KEPCO Three-Year Bond Yield Surpasses 4%... Warning Signs of Liquidity Crunch in Bond Market

4.031% Per Annum as of Previous Day

Breaks Through 4% Mark Again After 2 Years and 5 Months

The yield on Korea Electric Power Corporation (KEPCO) bonds has once again surpassed the 4% range, heightening tension across the entire corporate bond market. There are concerns that a rise in the yield of KEPCO bonds—considered premier government-guaranteed special bonds—could absorb a large amount of liquidity from the market, putting pressure on the private funding sector, including general corporate bonds and project financing (PF).

According to the Korea Financial Investment Association and KEPCO on May 20, the three-year KEPCO bond yield stood at 4.031% per annum as of the previous day. Earlier, on May 15, the yield climbed as high as 4.039%, marking the first time in approximately two years and five months since December 1, 2023 (4.047%) that it had breached the 4% threshold. Prior to this, the five-year KEPCO bond yield had already crossed the 4% mark, reaching 4.064% per annum on April 30.

The market is paying close attention to the fact that medium- and long-term yields have simultaneously entered the 4% range. KEPCO bonds are classified as AAA-rated top-tier bonds, virtually equivalent to government credit, and are highly favored by institutional investors such as insurance companies, asset managers, and pension funds due to their stability. As a result, when the yield on KEPCO bonds rises, lower-rated general corporate bonds or bonds issued by specialized credit finance companies must offer even higher yields to attract investor demand.

The market is concerned that rising KEPCO bond yields could recreate a crowding-out effect, absorbing liquidity from the broader market. In fact, during KEPCO's period of large-scale deficits in 2022, a surge in KEPCO bond issuance caused corporate bond yields to rise in tandem, worsening corporate funding conditions.

The recent rise in KEPCO bond yields is attributed in part to the sharp increase in long-term U.S. Treasury yields. According to electronic trading platform Tradeweb, the yield on 30-year U.S. Treasuries exceeded 5.18% as of the previous day, Eastern Time. The 10-year U.S. Treasury yield also reached 4.60% during the day, the highest level in 15 months.

Consequently, there is growing upward pressure on domestic Treasury and corporate bond yields. In addition, KEPCO's ongoing borrowing needs are also having an impact. Projections that future KEPCO bond issuance may increase—due to expanded investment in the power grid and financial structure burdens—are also driving market yields higher.

In particular, the market is focusing on the fact that the increase in yields, previously centered on long-term bonds, has now spread to three-year bonds. In the bond market, three-year yields typically reflect expectations for future policy rates; therefore, the fact that three-year yields have entered the 4% range suggests that market expectations for a policy rate cut have weakened.

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