Will the Bank of Korea's 10 Trillion Injection Stabilize CP Interest Rates?

SPV CP and Low-Credit Corporate Bond Purchases
"Improved Investor Sentiment" "More Time Needed"
Diverging Short-Term Interest Rate Recovery Outlooks

[Asia Economy Reporter Minji Lee] Amid the ongoing supply-demand imbalance in the commercial paper (CP) market, attention is focused on whether the Bank of Korea's special purpose vehicle (SPV) purchase of CP and low-credit corporate bonds worth 10 trillion won will stabilize the market.

Hong Nam-ki, Deputy Prime Minister and Minister of Economy and Finance, is delivering opening remarks at the 4th Emergency Economic Central Countermeasures Headquarters meeting held at the Government Seoul Office in Jongno-gu, Seoul, on the 20th. Photo by Hyunmin Kim kimhyun81@

According to data from the Korea Financial Investment Association's bond information system on the 22nd, the 91-day CP (based on A1 rating) rate recorded 1.91% per annum the previous day. This month's CP rate has fluctuated between 1.9% and the 2% range, maintaining a level higher than the 10-year government bond yield (1.3%). Although it is lower than the rate recorded on the 2nd of last month (2.23%), it remains high compared to the pre-COVID-19 spread period (1.5~1.6%). The CD-CP spread (90bp) alone is at a level comparable to the global financial crisis.

The reason CP rates are not easily falling is that securities firms' CPs are still trading at high levels. Due to the sharp decline in the underlying assets of equity-linked securities (ELS), securities firms suffering from margin call pressures issued large-scale CPs to overcome liquidity crises, leading to the rise in rates.

As the short-term funding market tightness prolonged, asset-backed commercial paper (ABCP) backed by project financing (PF) loan receivables was also fully exposed to risk. After COVID-19, securities firms found it difficult to absorb supply in the market, so they either raised rates significantly to raise funds or took on all the volumes they had committed to purchase with their own funds.

For this purpose, the CP issued by securities firms in May amounted to about 2.314 trillion won, approximately 976% more than the 215 billion won issued during the same period last year. The scale of PF ABCP and electronic short-term bonds maturing by the end of the first half (June) reaches about 12 trillion won, suggesting that pressure on CP rates to rise will increase further.

The Bank of Korea plans to purchase CPD and low-grade bonds through the SPV. Opinions in the securities industry differ on the outlook that if investment sentiment improves through the Bank of Korea's direct purchases and funds flow actively into new MMFs holding CP, rates will quickly return to normal levels.

Kim Eun-gi, a researcher at Samsung Securities, explained, "Securities firms have been using repurchase agreements (RP) by providing collateral to the Korea Securities Finance Corporation to use funds. If the Bank of Korea directly purchases without additional collateral capacity, investment sentiment can sufficiently improve." He added, "The biggest problem in the short-term funding market is investment sentiment improvement, and if the SPV actually operates in about a month and a half, rates could return to pre-COVID-19 levels."

On the other hand, Lee Tae-hoon, a researcher at Ebest Investment & Securities, observed, "After the Bank of Korea's SPV support, looking at the credit market, there are many corporate bonds with higher investment value than CP. It will inevitably take more time for CP rates to stabilize."

This content was produced with the assistance of AI translation services.