This study analyzes the repercussions of the sharp increase in government bond issuance following the economic crisis induced by COVID-19. The surge in the issuance of government bonds in South Korea was substantial, driven by the need for financial resources to support expansive fiscal policies in response to the pandemic. As government bond issuance rises, so does the yield on government bonds. Given that the demand in the financial market comprises households, businesses, the government, and external sectors, the increased issuance not only affects government bond yields but also leads to a rise in interest rates faced by households and businesses.

Conversely, the study explores the impact of government bond buy-backs on yield changes, offering a direction opposite to that of increased issuance. Utilizing a dynamic Nelson-Siegel model with macro factors, including macroeconomic variables, the study estimates changes in the yield curve resulting from both increased issuance and buy-backs. Empirical analysis reveals that a 1 trillion KRW increase in government bond issuance leads to a 2.5 to 2.9 basis points rise in yields, particularly pronounced in the medium to long-term maturities. Conversely, a 1 trillion KRW increase in government bond buy-backs results in a 1.9 to 2.1 basis points decrease in yields, with a more significant impact on medium to long-term maturities with relatively less demand.

Moving on to domestic demand factors, the study examines the influence of macroprudential regulations on government bond yields. Specifically, it analyzes the impact of restrictions on securities firms' participation in the call market and banking sector liquidity regulations, such as the Liquidity Coverage Ratio (LCR). These regulations, introduced to maintain stability in financial systems post-global financial crisis, have direct and indirect effects on government bond demand, consequently influencing market interest rates and resource allocation.

The analysis indicates that restricting securities firms' call market participation to below 25% of equity leads to a substantial increase in securities firms' participation in the repo market. Consequently, the demand for government bonds by securities firms increases, resulting in a yield decrease of approximately 10.8 to 12.5 basis points. Similarly, the phased introduction of LCR regulations leads to increased demand for government bonds by banks, contributing to a yield decrease of around 6.1 to 7.3 basis points. These findings underscore the importance of considering the ripple effects on financial markets through government bond demand when adjusting the intensity of financial stability regulations.

Lastly, the study examines the impact of external uncertainties, represented by global volatility (VIX), on foreign capital flows and exchange rates. Traditionally, an increase in VIX corresponds to capital outflows and currency depreciation. However, recent observations indicate a decrease in the magnitude of these effects, suggesting a shift in the behavior of foreign investors in government bonds. The study concludes by highlighting the need to consider the potential effects on financial markets through government bond demand when adjusting or introducing financial stability regulations in the future.

Abstract (English)

Foreword
Abstract (Korean)

Chapter 1. Introduction (Meeroo Kim)

Chapter 2. Impact of Increased Government Bond Issuance on the Yield Curve (Meeroo Kim, Jong Soo Hong)
　Section 1. Introduction
　Section 2. Literature Review
　Section 3. Current Status of the Government Bond Market
　Section 4. Model and Estimation Method
　Section 5. Data and Descriptive Statistics
　Section 6. Analysis Results
　Section 7. Conclusion

Chapter 3. Impact of Macroprudential Regulations on Government Bond Yields (Jong Soo Hong, Meeroo Kim)
　Section 1. Introduction
　Section 2. Literature Review
　Section 3. Overview of Regulations
　Section 4. Analytical Methodology
　Section 5. Data and Descriptive Statistics
　Section 6. Analysis Results
　Section 7. Conclusion

Chapter 4. Changes in Korea’s Government Bond Market and Policy Agenda: Focusing on Foreign Demand and Safe Asset Status (Woo Jin Choi)
　Section 1. Introduction
　Section 2. External Uncertainty and Capital Flows
　Section 3. Investment Environment in the Korean Bond Market and Policy Implications
　Section 4. Conclusion

Chapter 5. Conclusion (Meeroo Kim)

References
Appendix