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Are retail investor-exclusive treasury bonds good investments?

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By Lee Kyung-min

The subscription of 10-year and 20-year Korea Treasury Bond by retail investors exceeded 126 billion won ($91 million), Thursday, propelled by the promise of up to 108 percent held-to-maturity increase in return, market watchers said Friday.

The product was introduced by the government to grant equal access of retail investors to the vibrant market sector long limited to large institutional investors.

Underpinning the explosive demand is separate filing of financial incomes eligible for a flat rate of 15.4 percent. This is a major tax break, since the financial income combined with other business or earned incomes can push up the rate to nearly 50 percent.

However, the product is suitable only for long-term investors. A change in Treasury ownership mid-term is restricted, meaning short-term scalping is impossible. Scalping is an investment technique whereby an investor makes a small profit after holding a buy or a sell position for a very short time.

Also, early redemption will remove the benefit of the flat rate, along with the high rates of returns. Funds redeemed will not be immediately available.

Experts say the impact of the new products on the Treasury market of hundreds of trillions of won will be negligible, as indicated by the issue total limit of 1 trillion won this year and no prospect of scalping. The 1 trillion won is a portion hardly enough to trigger price volatility.

The Mirae Asset Securities-mediated sales of the product registered a subscription of 103.2 billion won for the 10-year Treasurys. The 20-year product drew 22.7 billion won.

Their respective returns will be 44 percent and 108 percent. After tax, the figures will be 37 percent and 91 percent.

Subscribers should put in at least 100,000 won. The annual limit is 100 million won. Per-person subscription is capped at 200 million won.

For example, 100 million won held-to-term investment in the 20-year Treasury will translate to 278 million won before tax.

A significant portion of the demands will come from wealthy individuals seeking to capitalize on the tax benefit, according to Mirae Asset Securities.

"Investors who don't mind having up to 200 million won locked in for 20 years are expected to be the primary customer base, among others with a stable source of income to fund the investment," a Mirae Asset official said.

Whether the popularity will continue remains to be seen, he added.

"We will need a couple more months to determine the popularity of the product as a whole."

Subscriptions can be sought monthly until November. This months' subscription will end Monday.
Lee Kyung-min


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