Rising Loan Interest Rates Amid Bank Bond 'Stirring'

Bank Bond Issuance Limit Expansion Leads to Net Issuance Turnaround in May
Challenges Accumulate in Second Half with Refinancing, Reverse Money Move, and DSR

Fixed (mixed) mortgage loan interest rates at commercial banks, which once fell to the mid-3% range, are showing signs of rising again. This is due to banks increasing their issuance of bank bonds. The financial sector notes that the volume of bank bonds maturing in the second half of the year reaches 125 trillion KRW, and with the anticipated easing of total debt service ratio (DSR) regulations related to reverse jeonse (key money deposit) loans, this trend is expected to continue for some time.

According to the Korea Financial Investment Association, as of the 9th, the 5-year AAA-rated bank bond yield was recorded at 4.134%. This represents an increase of about 25 basis points (1bp=0.01%) compared to the same day last month (3.881%). The 5-year bank bond yield is typically used as a benchmark interest rate for fixed-rate mortgage loans in the banking sector.

The 6-month bank bond yield, which serves as the benchmark for variable-rate mortgage loans, is also on the rise. The 6-month bank bond yield stands at 3.800%, up approximately 40 basis points from the year's low in the mid-3% range.

The 5-year bank bond yield rose to 4.572% in early March but then steadily declined to around 3.8?3.9% by mid-last month, supported by market expectations that the interest rate hike cycle by the Bank of Korea and other central banks worldwide was nearing its end.

A customer is receiving consultation at the bank loan consultation desk. Photo by Kang Jin-hyung aymsdream@

The rise in bank bond yields is due to a shift to net issuance of bank bonds starting last month. While bank bonds were being net redeemed at 4.71 trillion KRW in January, 4.51 trillion KRW in February, 7.41 trillion KRW in March, and 4.74 trillion KRW in April, last month saw a net issuance of 959.5 billion KRW, marking a reversal.

Banks expanded their bank bond issuance because, in March, authorities increased the issuance limit for bank bonds from 100% to 125% of the maturing amount. Last year, amid the Legoland incident that caused a sharp freeze in the bond market, authorities recommended restraint in bond issuance to prevent excessive concentration of funds in bank bonds. However, as market conditions improved, this limit was expanded again. Banks are also increasing bond issuance urgently due to the normalization of the liquidity coverage ratio (LCR) regulation at the end of this month, which measures high-quality liquid assets against one-month net cash outflows.

As bank bond yields rise, mortgage loan rates at commercial banks are also gradually increasing. According to the financial sector, the mixed-rate mortgage loan rates at the four major commercial banks (KB Kookmin, Shinhan, Hana, and Woori) range from 3.94% to 5.73%, up from 3.68% to 5.48% last month, with the lower bound rising by 0.26 percentage points, approaching a return to the 4% range. Variable-rate mortgage loan rates also increased, ranging from 4.11% to 6.11%, with the upper bound up by 0.02 percentage points and the lower bound by 0.24 percentage points.

The financial sector expects loan interest rates to continue rising for the time being. This is due to the 125 trillion KRW worth of bank bonds maturing in the second half of the year and the government's indication of some easing of DSR regulations related to jeonse eviction loans in response to the recent downturn in the real estate market.

In particular, the recent reappearance of the 'reverse money move' phenomenon, influenced by incidents such as the SG crisis, is a concerning factor. At the end of last month, the demand deposits?classified as 'low-cost deposits'?at the five major banks (KB Kookmin, Shinhan, Hana, Woori, and NH Nonghyup) decreased by about 6.1 trillion KRW from the previous month to 602.8 trillion KRW, while time deposits increased by 11.8 trillion KRW to 817.5 trillion KRW.

A financial sector official said, “As bank bond issuance increases, bond yields inevitably rise, which directly affects new COFIX rates. With a large volume of refinancing issuance and a decline in low-cost core deposits, financial institutions are likely to face higher funding costs for the foreseeable future.”

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