This paper estimates the demand for South Korea’s government bonds across investor categories and projects future bond yields in light of the country’s rising debt trajectory. A cross-country analysis shows that public and non-bank sectors have been key drivers of increased foreign investor holdings of Korean government debt during the COVID-19 pandemic. Using sectoral debt holdings data, the paper examines the evolution of marginal holdings of government bonds by each sector and estimates the responsiveness of debt demand to bond yield changes. Over the past decade, domestic banks and public institutions, including the National Pension Service, have reduced their marginal holdings, while private pension and investment fund sectors have increased theirs. These findings highlight the growing importance of non-bank sectors in government debt demand, consistent with the literature (Fang et al., 2022). Foreign investors exhibit the highest demand sensitivity to bond yields, whereas domestic insurance companies show the lowest. Based on sectoral demand estimates, a 10% increase in government debt is estimated to raise bond yields by 43 basis points. By 2030, when Korea’s government debt is expected to reach 2,000 trillion won, bond yields are projected to rise to 4.85%, ceteris paribus. Notably, 60% of the projected yield increase is attributed to the inelastic demand of insurance companies. This underscores the importance of adjusting the investor composition of the government bond market, with a greater share of investors with higher demand elasticity to alleviate pressure on borrowing cost.

Abstract (ENG)

Preface
Summary (KOR)

Chapter 1. Introduction

Chapter 2. Literature Review

Chapter 3. Current Status and Characteristics of Government Bond Investors: A Cross-Country Comparison
　Section 1. Trends and Characteristics of Capital Flows in the Government Bond Market
　Section 2. Analysis of Foreign Investor Sectors in the Government Bond Market
　Section 3. Analysis of Domestic Investor Sectors in the Government Bond Market

Chapter 4. Marginal Holdings of Government Bonds by Investor Category

Chapter 5. Estimation of Government Bond Demand Elasticity by Investor Category
　Section 1. Specification of the Government Bond Demand Function
　Section 2. Estimation of the Government Bond Demand Function
　Section 3. Medium- to Long-Term Outlook for the Government Bond Market

Chapter 6. Conclusion and Policy Implications

References
Appendix