Bond Yields Decline... Expansion of Investment Demand and Market Stabilization Measures Effect

Bank of Korea Announces 'Financial Market Trends in December 2022'

Bond Market Stabilizes After Sharp Rise Following Legoland Incident

Household Loans Increase Due to Implementation of Anshim Conversion Loans

[Asia Economy Reporter Sim Nayoung] Short-term bond market interest rates, which surged after the Legoland incident last year, are falling. According to the "Financial Market Trends in December 2022" announced by the Bank of Korea on the 12th, interest rates on bank bonds (3 months), negotiable certificates of deposit (CD, 91-day), and commercial paper (CP, AI 91-day) all declined simultaneously.

Compared to the end of November last year, as of the 11th of this month, the largest drop was seen in CP, which fell by 0.65 percentage points (from 5.61% to 4.96%). The 3-month bank bond rate decreased by 0.33 percentage points (from 4.07% to 3.74%), and the CD rate fell by 0.15 percentage points (from 4.03% to 3.88%).

The Bank of Korea stated, "Despite the base rate hike on November 24 last year, short-term market interest rates declined because the rate hike was already priced in, and investment demand expanded due to institutional fund execution at the beginning of the year." It further explained, "The CP rate dropped sharply as credit concerns eased due to the effects of market stabilization measures."

During the same period, corporate bond rates also fell significantly based on the 3-year maturity: AA- grade dropped by 0.79 percentage points (from 5.48% to 4.69%), A- grade by 0.54 percentage points (from 6.35% to 5.81%), and BBB+ grade by 0.55 percentage points (from 8.90% to 8.35%). The Bank of Korea said, "Corporate bond rates showed a sharp decline centered on high-quality bonds due to the drop in government bond rates and the effects of market stabilization measures."

[Image source=Yonhap News]

In December, household loans from banks turned to a slight increase as the scale of mortgage loans expanded. The outstanding balance at the end of last year was KRW 1,058.1 trillion, an increase of KRW 300 billion compared to November. Although other loans including unsecured loans decreased by KRW 2.8 trillion from the previous month, mortgage loans increased by KRW 3.1 trillion, which was the background for the overall increase.

The Bank of Korea explained, "Despite weak demand for jeonse (key money deposit) loans, the increase in group loans continued, and the execution of the Safe Conversion Loan led to an increase in individual mortgage loan handling, expanding the scale of growth."

Corporate loans sharply decreased due to temporary repayments for year-end financial ratio management by companies, and the sale and write-off of non-performing loans by banks.

As of the outstanding balance in December last year, large enterprises had KRW 216.9 trillion, small and medium enterprises had KRW 953.4 trillion, and individual business owners had KRW 44.27 billion. These figures represent decreases of KRW 6.1 trillion, KRW 3.3 trillion, and KRW 800 million respectively compared to the previous month.

The Bank of Korea explained, "In the case of small and medium enterprises, the decrease was due to the gradual reduction of COVID-19 financial support and seasonal factors."