Big Step and Gangwon-do Crisis Direct Hit... October Bond Yields Rise, Issuance Volume Drops to 8.8 Trillion Won

October Bond Issuance Volume 55.2 Trillion Won
Corporate Bonds Also Down 1.6 Trillion Won Compared to Previous Month
Demand Forecast Participation Rate Down 167.9%p
Demand Forecast Unsold Rate 33.4%
Individuals Net Purchase 2.5 Trillion Won... Down 22.5% Compared to Previous Month
Foreigners' Net Purchase Volume Slightly Down Compared to Previous Month

[Asia Economy Reporter Hwang Yoon-joo] Due to the Bank of Korea's 'Big Step' (0.50 percentage point base rate hike) and Gangwon Province's refusal to guarantee payment for the 'Legoland ABCP,' short-term liquidity tightened further, causing domestic bond yields to rise in October. As a result, corporate bond issuance and demand for credit products significantly decreased, and participation rates in demand forecasts also declined. The net bond purchases by individuals and foreigners also shrank.

According to the 'October 2022 OTC Bond Market Trends' released by the Korea Financial Investment Association on the 10th, bond issuance amounted to 55.2 trillion won, down 8.8 trillion won from the previous month (64 trillion won). This was due to decreases in financial bonds, ABS, and corporate bonds. The outstanding issuance balance also fell by 100 billion won due to net issuance decreases in corporate bonds, Monetary Stabilization Bonds, financial bonds, and Monetary Stabilization Bonds, recording 2,598.7 trillion won.

The decline in bond issuance volume and outstanding issuance in October was attributed to the impact of high-intensity tightening and short-term liquidity market tightening triggered by Gangwon Province. Early last month, easing of financial market anxiety originating from the UK, concerns over high-intensity tightening due to the Federal Reserve's final base rate hike (expected 5%) amid persistent high inflation in the US, and the Monetary Policy Committee's big step rate hike (from 2.5% to 3.0%) caused domestic interest rates to surge sharply. After mid-October, following financial authorities' announcements of financial market stabilization measures and interventions in the bond market by the Bank of Korea and the Ministry of Economy and Finance, rates partially reversed downward.

In particular, the corporate bond market, a key funding channel for companies, contracted significantly. Corporate bond issuance decreased by 1.6 trillion won from the previous month to 3.7 trillion won. The Korea Financial Investment Association explained, "Credit spreads widened sharply due to credit tightening, leading to a decrease in demand for credit products."

ESG bond issuance in October also fell by 1.1144 trillion won from the previous month to 3.7032 trillion won, reflecting reduced demand for credit products amid short-term liquidity market tightening.

Demand forecasts also dropped significantly. October's corporate bond demand forecast amounted to 1.556 trillion won (20 cases), down 1.314 trillion won compared to the same month last year (2.87 trillion won). The total participation amount in demand forecasts was 1.523 trillion won, a decrease of 6.106 trillion won from the same month last year (7.629 trillion won). The participation rate (demand forecast participation amount/demand forecast amount) was 97.9%, down 167.9 percentage points from 265.8% in the same month last year.

The demand forecast non-sale rate (unsold amount/total issuance amount) was 33.4%. Unsold cases occurred in 10 cases for AA grade and above, 2 cases for A grade, and 2 cases for BBB grade and below.

October's OTC bond trading volume recorded 310.1 trillion won, down 63.5 trillion won from the previous month due to interest rate increases and issuance decreases caused by short-term financial market tightening. The average daily trading volume was 16.3 trillion won, down 2.4 trillion won from the previous month.

Although trading volume decreased, net buying momentum was maintained. This was due to increased investment demand driven by continued preference for high-interest bonds. By investor type, individuals net purchased 2.5 trillion won in corporate bonds, government bonds, special bonds, other financial bonds (including credit finance bonds), and bank bonds.

Foreigners net purchased a total of 4.8 trillion won, including 1.3 trillion won in government bonds, 1.2 trillion won in Monetary Stabilization Bonds, and 2.1 trillion won in bank bonds, attracted by relatively high interest rates compared to the country's credit rating and the weak Korean won; however, the scale decreased compared to the previous month.

As of the end of October, foreigners' holdings of domestic bonds stood at 231.3787 trillion won, an increase of 40 billion won from the previous month (231.0094 trillion won), showing stagnation over the past three months.

The CD yield at the end of October rose by 72 basis points from the previous month to 3.96%, reflecting the Monetary Policy Committee's base rate hike from 2.50% to 3.00%.

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