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Korea

Korea’’ss Development
Development Experience
Experience :: KTB
KTB Market
Market

November 2009

Republic of Korea

0
Content

Ⅰ. Overview of KTB Market


Ⅱ. Factors of KTB Market Development
1. Well-organized & systemized primary market
2. Constant efforts for boosting liquidity
3. Fostering inter-dealer market
4. Expanding investors’ base
5. Communication with market participants
[Appendix 1] Recent trend of interest rates
[Appendix 2] Recent history of KTB market
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. Overview of KTB Market

The Core of the Korean Bond Market

KTB Outstanding KTB Issue Volume

% of GDP
(trn Won) (trn Won)
300 30% 90 85.6
283.0

25.3%
24.4% 80
250 239.3 25%
70
206.8 60.7
200 20% 60 56
52.1
15.8%
50
150 15%
123.1 40
8.1%
100 10% 30
7.4%
19.4
55.6 20 15.2
3.9%
42.6 12.5
50 5%
18.8 10

0 0% 0

2009(e)
2009(e)

1998

2000

2002

2004

2006

2008
1998

2000

2002

2004

2006

2008

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* 283.0 trillion won Æ around 210 billion US dollars (taking into account the average exchange rate in the first half of the 2009)
. Overview of KTB Market (Con’td)

Abundant Liquidity in Secondary market

KTB Trading Volume Bid-Ask Spread of Gov’t Bond


(trn Won) (bp)
1600 25
1500.0

1400

20
1200
1056.9

1000 927.5 924


15

800

600 10

361
400
213.5 5
200
13.3
0 0
2009(e)
1998

2000

2002

2004

2006

2008

Philippines
Hongkong

Indonesia
Korea

Malaysia

Singapore
Japan

Thailand
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* Source : ADB, Asian Bonds Online, as of mid-2008
Ⅰ. Overview of KTB Market
Ⅱ. Factors of KTB Market Development
1. Well-organized & systemized primary market
2. Constant efforts for boosting liquidity
3. Fostering KRX Trading System (KTS) for KTB
4. Expanding investors’ base
5. Communication with market participants
[Appendix 1] Recent trend of interest rates
[Appendix 2] Recent history of KTB market
4
Ⅱ. Factors of KTB Market Growth

Basic Principles of Policy on KTB

Predictability
&
Transparency

KTB
Openness
& Efficiency
Communication

5
Ⅱ. Factors of KTB Market Growth (Con’td)
1. Well-organized & systemized primary market
Regular announcement of annual & monthly issuance plan
ƒ Annual plan (at the beginning of the year)
„ Gross (and net) issue volume of the year / Composition by maturity

ƒ Monthly plan (on the last Thursday of the previous month)


„ Issuance schedule and amount by maturity
„ Buyback schedule, types and amount
9 Monthly issue volume is determined considering the market condition, and KTBs are issued
as evenly as possible throughout the year to ensure market stability

Regular auctions
ƒ 3-yr KTB : Monday in 1st week / 5-yr KTB : Monday in 2nd week
ƒ 10-yr KTB : Monday in 3rd week / 20-yr KTB : Monday in 4th week
Well-functioning Primary Dealership Program

ƒ KTB underwriting / Market making / Policy dialogue 6


Ⅱ. Factors of KTB Market Growth (Con’td)
2. Constant efforts for boosting liquidity

Simplification & Fungible issue

ƒ Simple KTB Product Line


„ Fixed Rate : Only 4 types (3,5,10,20-yr)
„ Inflation Linked Rate : 1 type (10-yr)
ƒ Fungible Issue Frequency
„ 3ㆍ5-yr KTB : 6 months / 10ㆍ20-yr KTB : 1-yr
„ Inflation Linked 10-yr KTB : 2-yr

KTB Buyback & Introduction of Conversion Offer (from May, 2009)

ƒ Off-the-run KTBs of low liquidity exchanged for benchmark KTBs of high liquidity
„ 3 conversion offers in 2009
* bid-to-cover ratio : 338%(May), 227%(Jul), 234%(Sept)
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Ⅱ. Factors of KTB Market Growth (Con’td)

3. Fostering KRX Trading System for KTB

Improve transparency & credibility by fostering KRX market

ƒ At the beginning of the KTB market, its transparency & price credibility were at
a low level due to a lack of information sharing & a shortage of infrastructure

ƒ Opening of Trading System for KTB in KRX (1999~)


„ Improve trading convenience through the system whereby KTBs traded

„ Raise transparency & credibility by offering real-time price information and


concluding deals

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Ⅱ. Factors of KTB Market Growth (Con’td)
4. Expanding investors’ base

Diversified Investor Base

Breakdown of KTB Holders Increase of Foreign Holdings

Investment 35 12%
Comp,
ETC, 1.3% 9.9%
4.8% 30 9.2%
Securities, 10%
7.2%
25 7.4%

7.1% 8%
Insurance, Bank, 6.6% 6.5%
15.5% 43.4% 20
6%
15

4%
10 2.8%
2.0%
2%
Pension 5
Fund,
29.0% As of Dec 2008 0 0%
4Q06 2Q07 4Q07 2Q08 4Q08 1Q09 2Q09 3Q09
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Ⅱ. Factors of KTB Market Growth (Con’td)

5. Communication with market participants

Primary Dealer (PD) Major investors

- 12 Securities firms - Major pension funds


- 7 Banks Korean - Insurance firms
(As of Oct. 2009) Government - International banks

Overseas IR

-’08.11 Singapore
-’09.6 Singapore, Japan
& US
-’09.9 Hong Kong
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Appendix 1] Recent trend of interest rates

No considerable increase in interest rates due to abundant liquidity in


the market

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(%) 3yr KTB 5yr KTB 3yr coporate(AA-) Base rate
8

1
02-Jan-07 02-May-07 02-Sep-07 02-Jan-08 02-May-08 02-Sep-08 02-Jan-09 02-May-09 02-Sep-09
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[Appendix 1] Recent trend of interest rates (Cont’d)

Yield Curve Steepened

7%

Sep.30.2008
Dec.31.2007
6% Aug.31.2009

5%

4%
3-yr 5-yr 10-yr 20-yr

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Appendix 2] Recent History of KTB market

ƒ Mar. 1999 Opening of KRX Trading System for KTB

ƒ Jul. 1999 Implementation of Primary Dealer System

ƒ May. 2000 Introduction of Fungible Issue System

ƒ Oct. 2000 Issuance of 10-year KTB

ƒ Jan. 2006 Issuance of 20-year KTB

ƒ Sept. 2006 Granting Superior PDS non-competitive bidding option

ƒ Mar. 2007 Issuance of Inflation-linked KTB

ƒ May. 2009 Adoption of Conversion Offer

ƒ Sept. 2009 Change of KTB Auction Method (Dutch Æ Multi-price)

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Thank You

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