Eurobonds with Negative Interest Rates for 2 Consecutive Years... Overseas Central Banks and Sovereign Wealth Funds Account for 40%
[Sejong=Asia Economy Reporter Son Sunhee] The government’s foreign exchange stabilization fund bonds (foreign exchange bonds) issued earlier this month saw nearly 40% of the investors being high-quality investors such as overseas central banks and sovereign wealth funds. This is the secret behind the 'record-breaking success' of the issuance, which recorded the lowest spread ever. It is evaluated as a reconfirmation of Korea’s high external creditworthiness.
According to the Ministry of Economy and Finance on the 19th, among the investors of the 700 million euro euro-denominated bonds issued on the 7th, overseas central banks and sovereign wealth funds accounted for 37%. This is nearly double compared to the 19% share at the time of foreign exchange bond issuance a year ago. In addition, asset management companies and insurance companies accounted for 43%, and banks accounted for 20% respectively.
Foreign exchange bonds are bonds issued overseas by the government to raise foreign currency. They are considered a barometer to check the external creditworthiness of the issuing country’s economy. The fact that high-quality investors who seek safety and have long-term holding characteristics, such as overseas central banks and sovereign wealth funds, flocked to the bonds means that government bonds issued by the Korean government are recognized as 'safe assets' in the overseas market.
The euro-denominated bonds issued by the government this year were finally issued at -0.053% (5-year maturity) with a spread of 13 basis points (bp, 1bp=0.01%p). Not only did they record negative interest rates for two consecutive years following last year, but the spread was also the lowest ever. Considering that the bond issuance timing coincided with high market volatility due to the US tapering (asset purchase reduction), the China Evergrande crisis, and global inflation concerns, officials describe this as an astonishing achievement.
The Ministry of Economy and Finance initially planned to issue the bonds in early September, when the international financial market was relatively stable as in previous years, but postponed the timing to October. Although opinions were divided internally, they aimed to create a 'turnaround in sentiment' through foreign exchange bond issuance at a time of increasing market volatility.
In the case of dollar bonds, initial bidding was sluggish due to overlapping with China’s National Day holidays, but the mood reversed as euro bond bidding began. At one point, orders surged up to seven times the issuance volume. The Ministry initially set the euro bond spread at 35bp, but as investment demand poured in, it was reduced to 15-20bp and finally issued at 13bp. The ministry stated, "Thanks to the massive participation of high-quality investors, we were able to confidently and aggressively reduce the spread until the last moment."
In fact, right after the euro bond issuance, a foreign journalist reportedly asked twice whether the final spread was really 13 (Thirteen) and not 30 (Thirty), expressing surprise with "Unbelievable!" Deputy Prime Minister and Minister of Economy and Finance Hong Nam-ki was also said to have praised the process as "very dramatic" and encouraged the officials after being briefed on the issuance.
By successfully completing this foreign exchange bond issuance, the government was able to expand foreign exchange reserves at a low cost. According to the Bank of Korea, as of the end of September, foreign exchange reserves reached a record high of $463.97 billion. Furthermore, it is expected to have a positive impact on bonds issued by domestic financial institutions and companies in the future, which will help reduce foreign currency borrowing costs.
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