Legoland-Originated Bond Market Still a 'Powder Keg'... "Credit Risk Expanding"

Government to Provide Liquidity Including Chaean Fund for 2 Weeks
Major Bond Yields Slightly Stabilized Last Week
Concerns Over Foreign Currency Fund Tightening by Year-End Following Won
Normalization of Fundraising Market Required

[Asia Economy Reporter Ji Yeon-jin] As the bond market, which was shaken last month due to the default situation at Legoland in Gangwon-do, has recently calmed down slightly, experts are continuously emphasizing the need to pay attention to the spread of domestic credit risk as the funding market remains difficult.

According to the Financial Two-Job Association on the 7th, major bond yields showed a uniform upward trend in the morning. As of 9:40 a.m., the combined on- and off-market 2-year government bond yield was 4.246%, up 7.1 basis points from the previous trading day, and the 10-year government bond yield was trading at 4.246%, up 5.6 basis points. This is a rebound just one day after most bond yields, except for commercial paper (CP 91 days) on the 4th, slightly declined.

Financial authorities announced a market stabilization plan worth more than 50 trillion won on the 23rd of last month and subsequently purchased CP through the bond market stabilization fund, followed by purchasing asset-backed securities that were difficult to absorb in the market. They also supplied about 930 billion won in funds to small and medium-sized securities firms through Korea Securities Finance.

While these concentrated policies have somewhat eased psychological concerns, visible confirmation is still difficult. Yoon Yeo-sam, a researcher at Meritz Securities, said on the day, "(If we compare the market to a person, even if all organs are healthy, death can occur if one blood vessel is blocked)," adding, "the market reflects and moves up to a base interest rate of 3.75%, but the actual conditions at the decision point must be considered. Although domestic fundamentals are not yet at a severe stage, the slowdown trend is clear."

In particular, last week, the failure of Heungkuk Life Insurance to exercise the call on its dollar-denominated hybrid capital securities and DB Life Insurance's failure to exercise the call on its won-denominated hybrid capital securities further increased volatility in domestic and international financial markets. Han Kwang-yeol, a researcher at NH Investment & Securities, said, "Along with short-term money market concerns due to the Legoland issue related to Heungkuk Life Insurance's failure to exercise the call on dollar-denominated hybrid capital securities, KP (Korean foreign currency bonds) investment sentiment will be significantly lowered," predicting, "Due to the continuous rise in interest rates since the beginning of the year, insurers' solvency has decreased compared to last year, and the accounting standards (IFRS17 and K-ICS) to be introduced from next year are variables, so cases of non-exercise of calls by insurers with low solvency are expected to increase."

Due to the difficulty in raising dollar funds for such financial companies, credit risk is expected to continue for the time being. Lee Jae-hyung, a researcher at Yuanta Securities, explained, "Unlike in the past, the current expansion of credit risk shows a pattern where the credit premiums of high-quality corporate bonds, bank bonds, and financial institutions lead the overall market credit risk," adding, "This means that rather than concerns about individual companies' fundamentals burdening the credit market, the risk is greatly expanding due to a shortage of demand for bonds as market liquidity conditions deteriorate."

Currently, the yields on dollar bonds held by domestic insurers have surged by 8%, and concerns about tightening of both won and foreign currency funds are expected to grow toward the end of the year. The researcher said, "The worsening conditions for foreign currency borrowing by domestic institutions cannot simply be attributed to global dollar liquidity tightening," adding, "To calm the instability factors in the foreign currency funding market, the stability of won funds and the bond market must precede, which is also a necessary condition."

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