Bond market remains in doldrums despite gov’t revival efforts

The South Korean bond market is showing little sign of improvement despite the government’s revival efforts as a slew of state-run companies and financial companies are set to issue more low-risk bonds at higher yields by the end of the year.

At least 4 trillion won ($2.8 billion) worth of bonds is expected to be sold by state-run companies this month, and the spread between government and corporate bonds have further widened despite various state’s measures to provide more liquidity to the market. The spread was 141.8 basis points at the end of trading Tuesday, according to the Korea Financial Investment Association.

Corporate bonds of industries that are facing higher risk are being affected the most. On Tuesday, Hanshin Engineering & Construction’s bond, which matures in March 2023, traded at around 3 percentage points (300 bp) higher than the market interest rate, but during the day the difference exceeded 15 percentage points to 33 percentage points and widened to 59 percentage points to hit 65 percent.

An unnamed official in the bond market said it’s unusual for a debt with a short maturity to show such volatility, which shows how the market uncertainty is affecting prices. An official at Hanshin Engineering said it’s looking into what caused the huge movement.

Market volatility remains high also due to the continued sales of bonds by state-run companies that have high credit rating but offer debts at higher interest rates to attract investors.

In November alone, at least 4 trillion won worth of bonds by state-owned companies is expected to be sold, including about 2 trillion won from KEPCO. The electricity provider has said it plans to tap the market to raise 400 billion won on Nov. 3 after raising more than 700 billion won on Oct. 28 and Nov. 1 with rates of about 6 percent. An official at a security firm said that KEPCO has been raising 2 trillion won to 2.5 trillion won almost every month recently.

Korea SMEs and Startups Agency and Korea Housing Finance Corp. are also planning to raise 500 billion won from debt sales each this month. Other state-owned companies such as Korea District Heating Corp. and Korea Student Aid Foundation plan to tap the market.

But there are views that the market is showing some signs of improvement.

A researcher at Samsung Securities Co. said that that government bond market is stabilizing and the short-term fund market is showing some signs of improvement in investor sentiment. But the official said that it will take some time for the corporate bond market to recover amid concerns of an economic recession.

By Kim Myung-hwan, Kang Bong-jin, Ryu Young-wook, Cha Chang-hee and Kyunghee Park