National Treasury Bond Yields 'Warmth'... Will It Spread to the Short-Term Money Market?

Most Government Bond Yields Fall
Corporate Bond and CP Yields Continue to Rise

[Asia Economy Reporter Hwang Junho] Although financial authorities introduced a market liquidity support program to early alleviate concerns about tightening in the funding market, the market still appears unstable.

According to the Bond Information Center of the Korea Financial Investment Association on the 26th, the 3-year maturity government bond closed at an annual rate of 4.208%, down 1.3 basis points (bp) from the previous day. The 3-year bond recorded 4.241% in the morning, up 2bp from the previous day, but declined in the afternoon. The 10-year bond also recorded 4.35% in the morning but fell to 4.279% in the afternoon. On this day, government bond yields fell across all maturities except for short-term 1-2 year bonds. A decline in yields indicates a rise in prices.

The yield decline on this day is analyzed to be due to increased foreign purchases following liquidity support measures, Deputy Prime Minister and Minister of Economy and Finance Choo Kyung-ho’s statement the previous day about boldly reducing government bond issuance for the remainder of the year, as well as falling U.S. interest rates and stabilization in the U.K. market.

However, the easing did not extend to non-government bonds such as corporate bonds. In fact, the 3-year maturity AA- rated corporate bond yield rose 2.5bp to 5.553%, and the 3-year maturity BBB- rated corporate bond yield increased 2.2bp to 11.404%. The 91-day commercial paper (CP) rate rose 6bp from the previous trading day to 4.51%, marking the highest level of the year. The 3-year Korea Electric Power Corporation (KEPCO) bond and the 1-year industrial finance bond yields also rose to 5.633% and 4.656%, respectively.

Public and corporate bonds barely reached maturity but must bear high interest rates. Korea Airports Corporation (AAA) conducted a bidding on the 26th and decided to issue 60 billion KRW of 2-year bonds and 80 billion KRW of 3-year bonds on the 27th. Although the target amounts were fully subscribed, the yields were set 180bp and 191bp higher, respectively, compared to government bonds of the same maturity. Korea Electric Power Corporation (AAA) planned to issue 200 billion KRW of 2-year bonds on the same day but decided to issue only 60 billion KRW.

Meanwhile, the Financial Services Commission announced on the same day that it would supply more than 5 trillion KRW to securities firms temporarily facing liquidity shortages. Korea Securities Finance started support of '3 trillion KRW + α' from that day. In repurchase agreement (RP) transactions secured by government bonds, Monetary Stabilization Bonds, and bank bonds, high-quality corporate bonds (AA or higher) will also be accepted as collateral. When securities firms borrow loans using securities as collateral, high-quality corporate bonds (AA or higher), high-quality commercial papers (CP) rated A1 or higher, asset-backed commercial papers (ABCP), and medium-term corporate bonds will also be included as eligible collateral. From the 27th, the Korea Development Bank will prioritize purchasing CP worth '2 trillion KRW + α' for securities firms lacking qualified collateral.

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