BOK details advantages and risks of NPS issuing dollars, leaves FX bond decision to government

BOK details advantages and risks of NPS issuing dollars, leaves FX bond decision to government

BOK Details Advantages and Risks of NPS Issuing Dollar Bonds, Leaves FX Bond Decision to Government

The Bank of Korea (BOK) has outlined key considerations regarding the National Pension Service's (NPS) potential issuance of foreign-currency bonds, emphasizing both strategic benefits and risks to financial stability. While the BOK has not endorsed or opposed the move, it has underscored the need for careful evaluation of market impacts, aligning with its broader mandate to monitor inflation and exchange rate volatility.

The NPS, the world's third-largest pension fund with $992 billion in assets, has proposed issuing dollar bonds to diversify financing amid a weakening won, which has depreciated about 7% against the dollar since mid-2025. Strategic hedging operations, including selling U.S. dollar forwards, have already been implemented to stabilize the currency, with the won recently reaching a one-month high of 1,458.0 per dollar. A dollar bond issuance could further reduce pressure on the won by offsetting outflows from overseas investments, which have historically contributed to currency depreciation.

However, the BOK has highlighted risks, including increased leverage and potential market distortions. The NPS's use of dollar-denominated assets as collateral for bonds, while feasible, introduces complexity in managing liquidity and asset allocation. Additionally, the BOK noted that the won's volatility—driven by geopolitical risks, U.S. dollar strength, and domestic investment trends— requires cautious calibration of hedging strategies to avoid unintended market consequences.

The government, through a newly formed consultative body involving the NPS, finance ministry, and central bank, will ultimately decide on the bond issuance. First Vice Minister of Health and Welfare Seuran Lee emphasized the need for swift legal reforms to enable the move, ideally by year-end 2026. The BOK has extended a $65 billion currency swap program with the NPS to support hedging efforts, while also adjusting interest on reserve deposits to mitigate losses from such operations.

While the NPS's bond plan mirrors strategies used by the Canada Pension Plan, the BOK stressed that any decision must balance market stability with long-term investment returns. The pension fund's recent shift to reduce overseas equity exposure and prioritize domestic assets reflects this balancing act.

In its latest policy statement, the BOK reiterated its commitment to maintaining the base rate at 2.50% while closely monitoring inflation, exchange rate movements and financial stability risks. The NPS's bond issuance remains a key factor in this evolving landscape.