The South Korean government has issued 3 billion USD worth of foreign exchange stabilization bonds (FX bonds) denominated in U.S. dollars, with a premium rate of 9 basis points (1 bp = 0.01 percentage point) above U.S. Treasury bonds. This single-digit premium suggests that the so-called Korea discount is diminishing in the bond market.
On Friday, the Ministry of Finance and Economy announced that it had issued 3 billion USD in FX bonds under the SSA method on Thursday.
The bonds were split into 1 billion USD with a three-year maturity and 2 billion USD with a five-year maturity. The premium rates are 9 bp for the three-year bonds and 12 bp for the five-year bonds.
The government views the single-digit premium on the newly issued three-year FX bonds relative to U.S. Treasuries as a testament to South Korea’s high external creditworthiness and its recognition as a top-tier global asset.
A ministry spokesperson stated that the premium of around 10 bp over U.S. Treasuries, widely considered the world’s safest assets, is on par with or lower than those of international organizations or other advanced nations with the highest credit ratings. This indicates that the Korea discount is fading in the bond market.
The five-year bonds have also set a new record low premium, following the previous low of 17 bp in October last year, which analysts interpret as a positive sign.
For context, the premium on dollar-denominated FX bonds was 30 bp in 2019 and 24 bp in 2024 for five-year maturities.
This bond issuance has also bolstered South Korea’s foreign exchange reserves. The 3 billion USD issue is the largest since 2009 and will secure funds to repay FX bonds maturing in the latter half of the year.
In anticipation of growing market uncertainties, the government began preparing for this FX bond issuance late last year. They engaged global investors through group calls and one-on-one video conferences, highlighting South Korea’s AI competitiveness, efforts to revitalize the KOSPI, and potential inclusion in the World Government Bond Index (WGBI).
A Ministry of Finance official said the government capitalized on a period of reduced market volatility, shaped by recent U.S. federal budget agreements and the possibility of U.S.-Iran negotiations, to issue the FX bonds and attract investor interest. The official added that domestic institutions seeking foreign currency for overseas investments could use the historically low premium rates as a benchmark to secure more favorable terms when raising funds abroad.