Bank Bond Issuance Surge... Financial Bonds and Loan Rates Spike in Chain Reaction

The rapid increase in net issuance of bank bonds is occurring due to the abolition of issuance limits and competition to attract high-interest deposits. As a result, interest rates on other financial bonds and corporate bonds are soaring, worsening the funding conditions for specialized credit finance companies and general corporations, while household loan interest rates are also rising, creating a chain reaction.

On the 23rd, as domestic market interest rates and bank loan interest rates rapidly rise, a banner displaying loan interest rates is hung on the exterior wall of a commercial bank in Seoul. Photo by Jinhyung Kang aymsdream@

According to the Bond Information Center of the Korea Financial Investment Association on the 25th, the net issuance amount of bank bonds (issuance amount minus redemption amount) from the 1st of this month to the previous day was 6.76 trillion won. This net issuance scale not only exceeds the total net issuance of 4.68 trillion won in September but is also the highest level this year.

After the 'Legoland incident' last year caused a bond market freeze, banks minimized bond issuance to a refinancing level at the request of authorities. Even after the bond market stabilized earlier this year, a net redemption trend continued until July except for May. In March, net redemption peaked at 7.41 trillion won.

The authorities significantly eased the bank bond issuance limits to prevent a recurrence of the deposit interest rate competition among financial institutions that occurred from late last year to early this year. Excessive deposit competition could trigger large-scale money movement. According to the authorities, from October last year to January this year, when deposit competition was fierce, the total deposit increase across all financial sectors reached 96.2504 trillion won over four months.

Considering that the maturity of regular deposits in the financial sector is typically 12 months, the burden of deposits attracted at high interest rates last year is materializing this quarter. For banks to avoid interest rate competition like last year, they have no choice but to increase bond issuance. A banking sector official said, "When bank bond issuance normalizes, there is more flexibility in managing deposit interest rates."

As net issuance of bank bonds surges, other financial bonds (card and capital bonds) and corporate bonds are directly impacted. The increase in issuance of bank bonds, classified as high-quality bonds, is absorbing market funds, leading to rising interest rates and decreased issuance of bonds with relatively lower credit ratings. As of the previous day, the 3-year AA+ rated credit finance bonds had an interest rate of 4.793%, and the 3-year AA- rated corporate bonds had an interest rate of 4.812%, both rising by more than 16-17 basis points (1bp=0.01%) compared to the end of the previous month.

Accordingly, other financial bonds saw a net issuance of 298.2 billion won last month, but this month, redemptions exceeded issuance, resulting in a net redemption of 824 billion won. For corporate bonds, net redemption expanded from 125.1 billion won to 1.2975 trillion won. As this situation continues, companies are responding by borrowing from financial institutions, and credit finance companies are increasing the proportion of short-term funding.

A similar pattern is observed in loan interest rates. Recently, the U.S. 10-year Treasury yield surpassed the 5% mark, and with the increase in bank bond issuance, bank bond interest rates continue to soar. As of the previous day, the 5-year AAA rated bank bond interest rate was 4.697%, up 0.206 percentage points from 4.491% at the end of last month.

Household loan interest rates are also on the rise. As of the 23rd, the variable-rate mortgage loan interest rates at the five major commercial banks (KB Kookmin, Shinhan, Hana, Woori, NH Nonghyup) ranged from 4.56% to 7.15%. This means the upper limit of interest rates is returning to last year's year-end levels of 7-8%. A financial sector official said, "Although the authorities and banks have announced flexible management, the amount of bank bonds maturing in the fourth quarter of this year is about 34 trillion won," adding, "Loan interest rates are expected to continue rising for the time being."

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