Short-Term Debt Market Growth Slows Due to COVID Impact... First Decline in Short-Term Bonds

[Asia Economy Reporter Kim Eunbyeol] The growth of the short-term financial market slowed down last year due to the impact of COVID-19. In particular, short-term corporate bonds decreased for the first time since the system was introduced in 2013.

The Bank of Korea published the '2020 Short-term Financial Market Review' on the 12th, containing these findings. The analysis was limited to five markets: call loans, inter-institution repurchase agreements (RP), marketable negotiable certificates of deposit (CD) and interbank CDs, commercial paper (CP), and short-term corporate bonds.

As a result of the analysis, the size of the short-term financial market increased by only 8.3 trillion KRW last year. This increase was significantly smaller compared to previous years: +31.8 trillion KRW in 2016, +27.3 trillion KRW in 2017, +24.8 trillion KRW in 2018, and +52.9 trillion KRW in 2019.

Last year's CP growth was 2.9 trillion KRW, sharply reduced from 24.1 trillion KRW a year earlier. In particular, asset-backed commercial paper (ABCP) decreased by 3.4 trillion KRW last year, reversing from a 26.2 trillion KRW increase in 2019 to a decrease.

CDs decreased by 3.3 trillion KRW, and short-term corporate bonds decreased by 5.7 trillion KRW. Short-term corporate bonds recorded their first decline since the system's introduction, as not only asset-backed short-term corporate bonds (ABSTB) but also general corporate and financial institution short-term corporate bonds all decreased.

However, the RP market continued its growth, increasing by 13.8 trillion KRW, and the call loan market turned to an increase (-1.8 trillion KRW → +0.6 trillion KRW). The RP market was pointed out as having potential risks due to the high proportion of overnight transactions (93.6% in 2020), refinancing risk, and the uniform margin rate practice (market value of collateral / RP transaction amount, approximately 105%).

In a situation where the proportion of overnight transactions is high, if a shock occurs, RP selling institutions immediately face high pressure to repay funds. If the RP selling institutions fail to refinance, RP buying institutions may hastily dispose of collateral securities, which can cause a chain reaction negatively affecting other bond markets. The uniform margin rate practice can cause rapid capital outflows when combined with market instability.

The Bank of Korea stated, "Last year, policy authorities tried to reduce refinancing risk in the RP market by requiring RP selling institutions to hold cash assets and by setting differentiated minimum margin rates for RP buying institutions, but the effect was limited," and added, "Both policy authorities and market participants need to strengthen efforts to expand term transactions."