US Giant Step Shakes Bond Market... September Treasury and Corporate Bond Issuance Declines

September Government Bond Issuance Decreases by 4.2 Trillion
Corporate Bond Issuance Also Decreases by 100 Billion
3-Year Treasury Bond Yield Rises 50.1bp Compared to Previous Month

[Asia Economy Reporter Hwang Yoon-joo] Due to the Federal Reserve's (Fed) aggressive tightening stance, both government bond and corporate bond issuance volumes decreased in September. Additionally, domestic bond market interest rates rose significantly.

According to the "September 2022 OTC Bond Market Trends" report released by the Korea Financial Investment Association on the 11th, the bond issuance volume in September was recorded at 64.3 trillion KRW, down 4.2 trillion KRW from the previous month. This decline was influenced by decreases in government bonds and Monetary Stabilization Bonds. The outstanding issuance balance increased by 6.3 trillion KRW due to net issuance of financial bonds, special bonds, and ABS, reaching 2,599.1 trillion KRW.

Domestic bond interest rates in September showed a "short-term rise and long-term fall" phenomenon, rising sharply. This was attributed to the Fed's steep rate hikes (+75bp in September) and the Bank of Korea governor's mention of a big step, which influenced the rate increases.

Specifically, as of the end of September, the 3-year government bond yield rose 50.1bp from the previous month to 4.175%. The 1-year and 2-year yields increased by 11.4bp (3.382%) and 47.6bp (4.203%), respectively. The 10-year yield rose 37.5bp to 4.096%.

The Korea Financial Investment Association explained, "At the beginning of the month, the August inflation rate (+5.7%) fell short of expectations, slowing the rise in interest rates and causing domestic rates to increase slightly. However, from mid-month, the Fed's rate hikes, final rate upward revisions, and the Bank of Korea governor's big step remarks caused a sharp rise, but intervention by the Bank of Korea and the Ministry of Economy and Finance in the bond market, as well as the announcement of inclusion in the World Government Bond Index (WGBI) watchlist, led to a partial decline."

ESG bond issuance in September decreased by 182.4 billion KRW from the previous month to 4.8175 trillion KRW due to the sharp rise in interest rates.

Corporate bond issuance also decreased by 100 billion KRW from the previous month, recording 5.3 trillion KRW. Credit spreads slightly widened due to reduced demand for credit bonds amid the sharp rise in interest rates.

In September, corporate bond demand forecasts amounted to 1.748 trillion KRW (20 cases), down 3.147 trillion KRW compared to the same month last year (4.895 trillion KRW). The total participation amount in demand forecasts was 2.689 trillion KRW, a decrease of 13.712 trillion KRW from the same month last year (16.401 trillion KRW), and the participation rate (demand forecast participation amount/demand forecast amount) was 153.8%, down 181.3 percentage points from the same month last year (335.1%).

Unsubscribed amounts in demand forecasts occurred in 1 case for AA grade and 6 cases for A grade, resulting in an unsubscribed rate (unsubscribed amount/total issuance amount) of 20.5%.

OTC bond trading volume in September recorded 374.2 trillion KRW, down 12.7 trillion KRW from the previous month. However, the average daily trading volume increased by 1.1 trillion KRW from the previous month to 18.7 trillion KRW due to increased volatility.

In September, individuals continued to purchase corporate bonds, other financial bonds (such as credit finance company bonds), government bonds, and special bonds amid higher interest rates and a stagnant stock market, resulting in a net purchase of 3.2 trillion KRW.

Foreign investors net purchased a total of 7.5 trillion KRW in domestic bonds in September, including 4.5 trillion KRW in government bonds, 1.3 trillion KRW in Monetary Stabilization Bonds, and 1.7 trillion KRW in bank bonds, due to higher interest rates relative to national credit ratings and the weak Korean won. The outstanding balance of domestic bonds held by foreigners decreased by 80 billion KRW from the previous month (231.8201 trillion KRW) to 231.0094 trillion KRW due to increased maturities.

The CD yield at the end of September rose 32bp from the previous month to 3.24%, influenced by the Fed's giant step (75bp) rate hike and expectations of continued rate hikes by the Bank of Korea.

In September, QIB bond registrations amounted to 431.7 billion KRW (1 case). Since the system's introduction in July 2012, a total of approximately 131.2 trillion KRW across 337 issues have been registered as QIB bonds as of the end of September this year.

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