'Debt Investing' Rising Amid Bear Market Rally

[Asia Economy Reporter Junho Hwang] Despite the Bank of Korea's consecutive base rate hikes, the stock market rebounded, leading to an increase in leveraged investing, known as 'debt investment' or 'debt trading.'

According to the Korea Financial Investment Association on the 28th, the outstanding balance of margin loans in the KOSPI and KOSDAQ markets was recorded at 19.305 trillion won as of the 25th. It has maintained the 19 trillion won level continuously since the 10th of this month.

The balance was in the 21 trillion won range until June 15 but sharply declined through a steep market drop, entering the 17 trillion won range on June 28. Subsequently, on July 7, it reached 17.4946 trillion won, the lowest level this year.

However, as the stock market rebounded from early July, the 'debt investment' balance also increased, reaching 19.5045 trillion won on the 22nd. This represents an increase of about 2 trillion won in a month and a half. This level is similar to that of December 2020, just before the KOSPI surpassed 3,000 points. During the COVID-19 rally last year in August and September, the balance was around 25 trillion won.

Despite the increased interest burden due to recent rate hikes, 'debt investment' has significantly increased. This is analyzed as a result of more investors aiming for profits from the stock market rebound.

Mirae Asset Securities will raise some margin loan interest rates by 0.4 to 0.5 percentage points (p) depending on the loan period, effective from the 29th. This comes about four months after raising rates by 0.9% to 1.7% points on April 18.

KB Securities will increase the interest rates on general margin loans across all periods from the current 4.6% (1?7 days) to 9.0% (91 days or more) to 4.9% to 9.5%, a 0.3 to 0.5 percentage point hike, effective September 1. Following a 0.3 percentage point increase in some periods on July 1, KB Securities is raising rates again after two months.

NH Investment & Securities raised interest rates by 0.2 to 0.3 percentage points on the 5th of this month and will increase them again from purchase settlements on the 13th of next month. Interest rates for loan periods of 8 days or more will be raised by 0.2 to 1.0 percentage points.

Samsung Securities also raised some interest rates by 0.4 to 0.5 percentage points on the 9th of this month. The highest rates are 9.8% (over 90 days) for accounts opened at branches or linked with banks, and 9.9% (61?90 days and over 90 days) for non-face-to-face accounts.

The Bank of Korea's Monetary Policy Committee raised the base rate by 0.25 percentage points from 2.25% to 2.50% on the 25th. Considering soaring inflation and the won/dollar exchange rate, the rate was raised four consecutive times for the first time in history. The 91-day CD rate, which many securities firms use as a base rate when setting margin loan interest rates, also jumped from 0.77% in August last year before the rate hike cycle began to 2.92% currently.

Concerns are also emerging due to the increase in 'debt investment.' Margin trading can act as a trigger in the stock market during sharp price drops. If 'debt investment' stocks are forcibly liquidated through margin calls, individual investors suffer losses. Additionally, the increase in sell orders can contribute to further declines in the stock market.

Kang Songcheol, a researcher at Eugene Investment & Securities, explained, "During the market crash in June, the liquidation of 'debt investment' appeared to significantly contribute to the expansion of the index's decline," adding, "It can be said that the credit and unsettled trades, which greatly increased during the stock price surge, have come back like a boomerang."

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