Bond Market Facing Headwinds... 15% of Corporate Bond Demand Forecasts Fall Short

Interest Rate Hike, Sharp Increase in KEPCO Bond Issuance
Aftermath of Legoland Guarantee Refusal
Institutions Close Wallets and Adopt a Wait-and-See Approach

Government Support Measures Positive in Short Term
Confirmation of Interest Rate Peak Needed to Restore Investor Sentiment

On the 23rd, Lee Bok-hyun, Governor of the Financial Supervisory Service, Lee Chang-yong, Governor of the Bank of Korea, Choo Kyung-ho, Deputy Prime Minister for Economy, Kim Joo-hyun, Chairman of the Financial Services Commission, and Choi Sang-mok, Senior Secretary for Economic Affairs, posed before the start of the 'Emergency Macroeconomic and Financial Meeting' held at the Korea Federation of Banks building in Jung-gu, Seoul. Photo by Yoon Dong-joo doso7@

[Asia Economy Reporter Minji Lee] Amid the prolonged trend of interest rate hikes, it has been revealed that 15% of this year's corporate bond demand forecasts failed to meet their target issuance amounts due to issues such as Gangwon Province's refusal to provide payment guarantees and the sharp increase in Korea Electric Power Corporation (KEPCO) bond issuance.

According to the financial investment industry on the 30th, out of 264 corporate bonds issued this year up to the 27th of this month, 40 cases (15.15%) recorded a demand forecast competition rate below 1. A demand forecast competition rate below 1 means that the bond order amount through the demand forecast did not reach the initially targeted issuance amount.

With the global interest rate hikes this year increasing the burden on the bond market, the negative factor of massive KEPCO bond issuance overlapped, and institutional investors closed their wallets early to avoid bond valuation losses, resulting in poor investor sentiment.

Furthermore, when Gangwon Governor Jin-tae Kim announced at the end of last month that Gangwon Jungdo Development Corporation (GJC), the developer of the Legoland theme park, would not repay its debt, the bond market froze even more. In fact, among the 40 cases where under-subscription occurred in the demand forecast, 14 cases (35.00%) happened this month. Even high credit rating companies such as JB Financial Group (AA+) and Meritz Financial Group (AA) failed to meet their target amounts. Hanwha Solutions (AA-) attempted to raise 50 billion KRW with a 3-year bond but did not receive a single order, and Tongyeong Eco Power (A+), which conducted a demand forecast for 51 billion KRW on the 27th with a 3-year bond, faced a complete non-sale situation.

An official from the bond management industry said, “As the year-end approaches, available funds decrease, causing investor sentiment to shrink, but this year, due to various negative factors, a wait-and-see stance has deepened, and institutional investors have entered book closing since September,” adding, “Liquidity in the market has significantly decreased.” With existing bond maturities steadily arriving, the bond market tightening appears to be worsening.

Experts expect that following the authorities' announcement on the 23rd of a '50 trillion KRW + α' liquidity supply program policy and the securities industry's agreement, centered on major firms, to absorb ABCP themselves, the bond market will gradually stabilize through various announced measures. However, since caution regarding interest rate hikes continues, for investor sentiment recovery in the bond market, it is necessary to slow the pace of rate hikes early next year.

Kiwoom Securities researcher Yeha Ahn said, “This government measure is an appropriate policy level to alleviate market anxiety in the short term,” adding, “However, concerns about liquidity tightening in a high-interest-rate environment can frequently arise, so ultimately, the key is what signal the U.S. Federal Reserve gives at the November FOMC.”

Researcher Ahn also stated, “If energy prices remain high due to winter demand, caution about inflation may continue, so it is still too early to expect a recovery in investor sentiment in the bond market.”