South Korea will closely monitor a potential increase in volatility of the financial markets as the yield spread between short and long-term state bonds is increasing, the vice finance minister said Tuesday.

First Vice Finance Minister Kim Yong-beom also said rising US Treasury yields are serving as the main factor that has recently driven the dollar higher against major currencies.

Yields on 10-year government bonds recently jumped on anticipation for an economic recovery and expected bond sales to finance massive fiscal spending, thereby widening the yield spread with 3-year Treasury bonds.

The yield spread between 3-year and 10-year government bonds came to 76.9 basis points on Jan. 5, the widest gap since June 2015. The return on 10-year Treasury bonds reached 1.734 percent on Jan. 14.

The trend is in line with a rise in US Treasury yields. Expectation for a massive economic stimulus package under the incoming Biden administration pushed the yield on 10-year notes to above 1 percent.

"As yields on government bonds with longer maturities are rising, the yield spread with shorter-term Treasurys is also widening," Kim said at a meeting on the macroeconomy and financial markets.

"The government will spare no efforts to strengthen financial stability by monitoring economic situations at home and abroad and the movement of bond yields, and keeping a close tab on a potential rise in market volatility," Kim said.

South Korea plans to sell state bonds totaling 176.4 trillion won ($160 billion) this year as it seeks to increase fiscal spending to cope with the fallout of the new coronavirus outbreak.

Even as the central bank has kept the policy rate at a record low of 0.5 percent, market interest rates could go higher in tandem with rising yields on 10-year Treasurys. Amid the protracted pandemic, rising market rates could jack up people's burden of repaying debt, thus crimping an economic recovery.

The finance ministry said in a 2021 policy report that it will actively take steps to stabilize the bond market this year.

To this end, the country will begin to sell two-year Treasurys for the first time in an effort to soothe market uneasiness from the planned massive bond sales.

The country will also provide incentives to encourage retail investors to buy state bonds. Tax benefits or additional interest rates will be given if retail investors hold 10-year or 20-year bonds until maturity.

Meanwhile, in an effort to stabilize the foreign exchange market, the ministry said it will unveil measures to improve the management of FX risks in January.

The country plans to beef up FX liquidity rules at non-banking institutions and overhaul a scheme of imposing FX-related levies on financial firms. (Yonhap)