'Bond Market Polarization' Institutions Include Only MBS on Their 'Shopping List'

Institutional Funds Focused on High-Interest and Zero-Risk Bonds
Unsold Bonds Issued by Regional Financial Holding Companies
High Unsold Rates for AA Grade and Below Bonds

[Asia Economy Reporter Park So-yeon] As steep interest rate hikes and concerns about the future economy coincide, institutions' "shopping lists" are filled only with risk-zero (0) bonds such as MBS (Mortgage-Backed Securities) and major financial holding company bonds. Ultra-high-grade bonds are acting as a "black hole" that sucks in the remaining funds in the market.

According to the investment banking (IB) industry on the 26th, recently Pension Fund A invested about 200 billion KRW in MBS issued by the Korea Housing Finance Corporation. With MBS yields rising to the high 5% range, it was judged that profitable and low-risk investments are possible. MBS are securities issued based on mortgage loans secured by houses provided by financial institutions, and are a type of asset-backed securities (ABS). They are also called "Mortgage-Backed Bonds".

Pension Fund B is also considering investing in MBS issued by the Korea Housing Finance Corporation. A senior official from Pension Fund B said, "At the current interest rate level, there is no safer investment than this," adding, "There are high-interest AAA bonds, so there is no reason to look elsewhere." He also hinted, "Currently, we only hold MBS and bonds issued by major financial holding companies."

Recently, as the domestic bond market has frozen overall, demand has concentrated only on AAA-rated bonds. It is reported that bonds issued by regional financial holding companies are facing severe situations, with large-scale unsold amounts occurring in demand forecasts.

The recent turmoil in the bond market was triggered by the Legoland Asset-Backed Commercial Paper (ABCP), but the main cause was the sudden rise in interest rates. With the base rate hike causing bond yields to soar (bond prices to fall), buying demand for risky credit assets has sharply declined, and polarization between high-grade and non-high-grade bonds has intensified.

According to data from the Korea Financial Investment Association on the demand forecast status for public corporate bonds in the third quarter of this year, the demand forecast ratio by credit rating shows extreme polarization, with AA-rated bonds at 73% and A-rated bonds at 19%. Last year, AA-rated bonds were at 61% and A-rated bonds at 33%. In the third quarter of this year, 16 cases of unsold bonds occurred, recording an unsold rate of 14%, which is a 13 percentage point increase compared to the third quarter of last year.

Looking at participation by sector, securities companies took 42% of the total volume in the third quarter, asset management companies took 22%, and pension funds and others took 22%, with banks and insurance companies each accounting for about 7%. Pension funds and other institutions accounted for a high proportion of 24% in AA-rated and above bonds, but participation in A-rated bonds was only 2%. Compared to 14% in the third quarter of last year, this indicates a deepening aversion to non-high-grade bonds.

Concerns are emerging that the "financial paralysis" of the bond market will worsen as year-end, when fund demand surges, approaches. On the 23rd, the government announced a liquidity supply plan of "50 trillion KRW + alpha" at an emergency macroeconomic financial meeting, and from the 24th, it began purchasing bonds through a 1.6 trillion KRW bond stabilization fund, activating the bond stabilization fund.

Experts say that while such policies may serve as short-term measures to stabilize the bond market, they are insufficient to completely alleviate concerns about the ongoing global tightening trend.

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