KRW50tn to Be Injected into Bond Market
The South Korean government and the Bank of Korea announced on Oct. 23 that they would supply at least 50 trillion won to the bond market.
The amount includes a bond market stabilization fund of 20 trillion won. Corporate bond and commercial paper purchase will be resumed on Oct. 24 using 1.6 trillion won in the fund and fund requests will be sent to financial institutions for the rest of the resources. Korea Development Bank, Industrial Bank of Korea and Korea Credit Guarantee Fund will double their corporate bond and commercial paper purchase to 16 trillion won and the Korea Securities Finance Corporation will supply three trillion won to securities companies showing a temporary liquidity shortage.
This is because short-term fund and bond market conditions are deteriorating rapidly. According to the Korea Financial Investment Association, the difference between three-year government and corporate bond yields increased to 1.3 percentage points on Oct. 21, the highest since September 2009. The yield of 91-day CP with an A1 rating rose 0.15 percentage point to 4.25 percent that day, topping 4 percent for the first time since January 28, 2009.
It is pointed out that the measures of the government and the central bank are not enough. “The government blocked KEPCO from raising the price of electricity it supplies and the corporation is issuing a large number of bonds for financing purposes instead,” an expert said, adding, “The KEPCO bond yield is higher than that of AA- corporate bonds and this has to be addressed for the corporate bond market liquidity shortage to be solved.”
At the same time, real estate project financing loans are posing increasing risks with interest rates rising. Those outstanding in the banking sector increased from 21.5 trillion won to 28.3 trillion won from January 2014 to June this year, when those outstanding in the non-banking sector including insurers and securities companies soared from 13.8 trillion won to 84 trillion won.