KEPCO Bond Issuance Rates Plummet to the 4% Range

3-Year Maturity Average Market Interest Rate Also in the 4% Range... Experts Forecast "Further Interest Rate Decline"

[Image source=Yonhap News]

[Asia Economy Reporter Minji Lee] The decline in bond yields of Korea Electric Power Corporation (KEPCO) is accelerating. Following the 2-year bonds, the average private bond evaluation (Minpyeong) yield for 3-year bonds also fell into the 4% range for the first time since last September.

According to the bond market on the 19th, KEPCO confirmed the issuance of a total of 500 billion KRW worth of bonds through a morning auction. This includes 350 billion KRW in 2-year bonds and 150 billion KRW in 3-year bonds. The auction attracted funds of 700 billion KRW and 410 billion KRW respectively, totaling 1.11 trillion KRW.

The decline in issuance yields deepened compared to previous issuances. The 2-year bond yield was set at 4.2%, and the 3-year bond at 4.45%. Compared to the issuance yields on the 14th of 4.4% and 4.55%, these represent decreases of 20 basis points (bp) (1bp=0.01 percentage point) and 10bp respectively. Compared to the issuance yields on the 12th (2-year 4.47%, 3-year 4.65%), the yields dropped by 27bp and 20bp respectively. The government's liquidity supply measures have improved investor sentiment toward corporate bonds, bank bonds, and high-quality credit bonds, contributing to the yield decline.

The downward trend in Minpyeong yields, which influence issuance yield calculations, also continued. Notably, the Minpyeong yield for 3-year bonds fell into the 4% range. As of the 16th, which served as the benchmark for this issuance, KEPCO's average Minpyeong yields were 4.755% for 2-year bonds and 4.821% for 3-year bonds. In the previous auction, only the 2-year bond's average Minpyeong yield dropped to 4.974%, entering the 4% range for the first time since last September. At that time, the 3-year bond yield was 5.043%.

Bond market insiders believe that since KEPCO bonds had been priced at relatively high yields, further declines in yields may continue. Even in the secondary market, the yield spread between KEPCO bonds and government bonds remains significantly wide. As of the 16th, the 3-year government bond yield was 3.539%, whereas KEPCO bonds stood at 4.873%, a difference of 133bp. A year ago, the yields were 1.740% and 2.078% respectively, with a spread of only 33bp.

If the amendment to the KEPCO Act, which expands the corporate bond issuance limit from twice to five times the sum of capital and reserves to cover KEPCO's deficit, passes the plenary session within this month, the burden of issuance volume may continue. However, if the deficit size decreases due to an increase in fuel cost adjustment rates, the pressure on corporate bond supply and demand may ease. Currently, the securities industry expects electricity rates to rise by about 30 to 40 KRW per kWh. When the KEPCO Act amendment was rejected on the 8th, Rep. Yang Eui-myung of the Democratic Party argued that the rate should be increased by about 60 KRW per kWh. A bond industry official said, “The deficit next year is expected to be smaller than this year,” adding, “Considering the reduced issuance burden compared to this year and the continued improvement in investor sentiment toward bonds, the possibility of a sharp rise in yields is low.”

Meanwhile, KEPCO's annual operating loss this year is expected to continue at 31.2791 trillion KRW. The projected operating loss for next year is 12.7 trillion KRW, indicating that about 19 trillion KRW of the deficit will be covered.

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