Government Successfully Issues $14.5 Billion Foreign Exchange Bonds... Euro-Denominated Foreign Exchange Bonds Issued at 'Negative Interest Rate'

5-Year Euro-Denominated Foreign Exchange Bond Issuance Yield at -0.059%
First Negative Yield Issuance Among Euro-Denominated Sovereign Bonds from Non-European Countries
Government: "Reaffirming Confidence in Han Economy Amid Uncertainties Such as COVID-19"

10-Year Dollar-Denominated Foreign Exchange Bonds Spread Trend (Source: Ministry of Economy and Finance)

[Asia Economy Reporter Kim Hyunjung] The government has successfully issued foreign currency-denominated Foreign Exchange Stabilization Fund Bonds (FESFB) worth $1.45 billion at historically low interest rates. Among these, the euro-denominated FESFB was issued at a negative interest rate, enabling the procurement of foreign currency without interest costs until maturity (5 years). This reaffirms overseas investors' confidence in the Korean economy amid ongoing global economic uncertainties such as the spread of the novel coronavirus disease (COVID-19).

The Ministry of Economy and Finance announced that it issued $625 million of 10-year maturity U.S. dollar-denominated bonds and €700 million of 5-year maturity euro-denominated bonds on the same day. The euro-denominated FESFB was issued for the first time in about six years since June 2014, with an interest rate (5-year maturity) at a record low of -0.059%. This is the first case of a negative interest rate bond issuance among euro-denominated government bonds from non-European countries. Therefore, the government received €720 million, which is more than the face value of €700 million, and will repay only the face value (€700 million) at maturity.

The 10-year maturity dollar-denominated FESFB was also issued at historically low levels for both the coupon rate and the spread (based on 10-year maturity). The coupon rate was 1.198%, significantly lower than past dollar-denominated FESFBs (10-year maturity basis: 2.871% in 2017, 3.572% in 2018, 2.677% in 2019) due to the decline in benchmark U.S. Treasury yields.

The spread (50 basis points) was also the lowest for the same maturity dollar-denominated bonds (55 basis points in 2017 and 2019), and was issued at a rate much lower than the yields of similar outstanding FESFBs currently trading in the market. The yield on the 2029 maturity FESFB is around 61 basis points.

The ability to issue FESFBs at such low interest rates was due to strong demand from overseas investors. According to the Ministry of Economy and Finance, investor orders for dollar- and euro-denominated FESFBs exceeded $5 billion and €5 billion respectively, leading to an increase in the issuance size from the initially planned $500 million and €500 million (the annual issuance limit for FESFBs is $1.5 billion).

Even after a significant downward adjustment from the initially proposed interest rate conditions, the final valid orders were 5.8 times the final issuance volume for the dollar-denominated bonds and 7.8 times for the euro-denominated bonds (the previous record was 5.7 times in 2018).

The overall investor composition also showed diversification, with central banks and sovereign wealth funds holding a high proportion of investments, and many investors from Europe and the Middle East?who had not previously invested much in Korean assets?participating, the Ministry explained.

This FESFB issuance is significant in reaffirming overseas investors' trust in the Korean economy amid ongoing global uncertainties such as the worldwide spread of COVID-19 and U.S.-China tensions.

The Ministry of Economy and Finance stated, "During the investor briefing held via global conference calls due to international travel restrictions (September 7?8), most overseas investors highly evaluated Korea's COVID-19 response achievements as well as the fundamentals of the Korean economy, including external soundness." It added, "This positive evaluation was a foundation for the successful completion of the FESFB issuance despite the recent expansion of international financial market instability, such as the sharp decline in U.S. stock prices."

Furthermore, through this FESFB issuance, the government was able to further increase foreign exchange reserves, strengthening its capacity to respond to future financial and foreign exchange market instability. In particular, since the euro-denominated FESFB was issued at a negative interest rate, foreign currency was procured without interest costs until maturity, and the premium from the issuance above face value contributed additionally to the foreign exchange reserves.

Additionally, as FESFBs serve as a benchmark for Korean foreign currency bonds, it is expected that this will lead to lower issuance costs for overseas bonds by domestic companies and financial institutions and reduce their overseas borrowing costs in the future.

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