Has the effect of the rate hike worn off... KEPCO bonds surpass 4% again after 3 months

The issuance yield of Korea Electric Power Corporation bonds (KEPCO bonds) has surpassed the 4% level again. It has been about 80 days since the KEPCO bond yield, which had been attracting funds from the domestic bond market, rose to the 4% range on March 10.

According to the Korea Financial Investment Association on the 30th, the issuance yield of 3-year KEPCO bonds recorded 4.112% as of the 26th. The KEPCO bond yield fell to 3.683% in March this year after hitting an annual high of 5.825% last October, but it has turned upward this month.

Last year, KEPCO increased the issuance volume of KEPCO bonds to 31.8 trillion KRW to secure operating funds due to large-scale deficits. By issuing high-quality KEPCO bonds at an average monthly amount of 2.65 trillion KRW with a 4.19% interest rate, a crowding-out effect occurred where corporate bonds from general companies were neglected.

The recent rise in KEPCO bond issuance yields is due to weakened expectations of interest rate cuts by the Bank of Korea, causing government bond yields to stir. As of the 26th, government bond yields for 3-year (3.524%), 5-year (3.550%), and 10-year (3.639%) maturities all exceeded the base rate for the first time in two months. According to the U.S. Federal Reserve, some members of the Federal Open Market Committee (FOMC) emphasized the need for additional rate hikes, drawing attention to a possible increase in July.

[Image source=Yonhap News]

Fortunately, KEPCO has been reducing corporate bond issuance this year. As of the 24th of this month, it issued a total of 10.3 trillion KRW, a 17.7% decrease compared to 12.53 trillion KRW during the same period last month. In January this year, it issued 3.21 trillion KRW at an average interest rate of 4.15%, but last month only 1.54 trillion KRW (3.95%) and this month so far 800 billion KRW (3.86%) were issued.

However, some express concerns that if electricity demand rises this summer, KEPCO’s deficit could expand, leading to an increase in new corporate bond issuance again. KEPCO recently raised electricity rates by 8.0 KRW per kWh in the second quarter of this year, but this is insufficient to fully offset the deficit. Additionally, as of the first quarter, the combined daily interest cost of KEPCO and its subsidiaries reached 11 billion KRW, imposing a significant burden. If the deficit grows, there is an analysis that a vicious cycle of increasing corporate bond issuance to secure operating funds may continue.

If KEPCO’s corporate bond issuance yields rise, it could again cause turmoil in the bond market as it did last year. If the issuance of AAA-rated high-yield KEPCO bonds increases, corporate bonds rated A or below issued by general companies may have to raise their yields further to attract investors. Currently, the yield on corporate bonds (unsecured 3-year AA-) is 4.353%, and unsecured 3-year BBB- bonds yield 10.743%.