Uninterrupted Hedge Leads to Record High Bond Lending Balance... Concerns Over Increased Volatility

[Asia Economy Reporter Lee Seon-ae] As the bond market size has increased to an all-time high and interest rates have risen, hedge (risk avoidance) transactions to offset bond management losses have also increased, leading to expectations that the unstable supply and demand environment in the bond market will continue. The warning lights have also turned on for companies that need to raise funds through corporate bonds.

According to the Korea Financial Investment Association on the 4th, the bond lending balance reached a record high of 125.6189 trillion won the previous day. Since surpassing 100 trillion won for the first time on October 14 last year, it has steadily increased. Starting from 105.1216 trillion won this year, it has consistently stayed above 100 trillion won, then exceeded 120 trillion won as bond prices began to plunge sharply, and now has surpassed 125 trillion won.

Bond lending is a concept similar to stock short selling. The sharp increase in bond lending balances means that institutions have been continuously trading to hedge losses caused by the surge in interest rates to the highest level of the year and the consequent sharp drop in bond prices. Hedging involves buying relatively lower-priced government bond futures while borrowing and selling overvalued spot bonds in advance to respond to the decline in bond prices. This process increases lending transactions and balances.

The increase in government bond lending balances reflects concerns that government bond prices (government bond interest rates) will fall (rise), meaning that government bond sell orders have accumulated. If the record-high amount of government bonds lent is released into the market, it can act as a 'catalyst' to push government bond interest rates even higher, inevitably increasing volatility in the bond market and interest rates.

A bond management officer at a securities firm said, "Since foreigners are net buyers of bonds, if bond interest rates fall even slightly, securities firms will immediately sell the bonds they hold to hedge, so the supply and demand environment in the bond market will continue to be unstable."

Another official warned, "If demand to repurchase borrowed government bonds (short covering) surges, government bond interest rates could plunge again, raising concerns that volatility in the government bond market will increase accordingly."

Warning signals have also turned on for corporate funding. Along with government bond interest rates, corporate bond interest rates have surged sharply, worsening the funding environment. As companies’ interest burdens increase and the funding environment deteriorates further, the finance departments are on high alert.

As companies rush to secure funds, the balance of asset-backed securities (ABS) is rapidly increasing. As of the previous day, it reached 68.2757 trillion won. Considering that the balance was 65.1754 trillion won at the end of December last year, it has increased by 3 trillion won. Most companies that find it difficult to issue corporate bonds in the public market on their own issue asset-backed securities with credit enhancement support from securities firms or parent companies.

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