Bond Market Climbs On Low Bank Rates

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Bond Market Climbs On Low Bank Rates

There are signs that the corporate bond market is improving compared with the past few months, with analysts attributing the better showing to lower bank rates. But, they said, it is still too early for any pronouncement since corporations faced with rising government and corporate bond yields lately are slowing issuances.

Corporate bond issuances continued falling last year, but the trend turned around in January, with the number of net issues hitting 3.37 trillion won ($2.65 billion) in face value in February. The issuance of lower-grade bonds, which have kept investors at bay, also recorded a net increase in February, the first since May.

Commercial papers posted a net redemption of 223.8 billion won as a whole in February, but corporations issued 900 billion won in papers, whereas credit card companies and financial institutions redeemed debts.

The apparent activity in the bond market is due primarily to the low rates on bank deposits and investors' preference for the higher yields of corporate bonds. The deposits in bank savings accounts,which continued to increase through last year, slowed early in 2001 and began dropping in February, with a net withdrawal of 1.8 trillion won. Trust accounts at banks, which invest primarily in fixed income securities, rose 3.02 trillion won in February alone, and money market funds at investment trust companies attracted 13.17 trillion won (net) in the first two months of the year.

The relatively lower bank deposit rates are also reflected in the increasing demand in the housing market. The number of unsold new apartment units fell 2.16 percent in January from the previous month, and real estate agents reported that inquiries from prospective homebuyers are increasingly frequent.

The rising government bond yield in March is fueling concern about the capital market. Falling below 5 percent last month, the three-year government bond yield passed the 6-percent mark Wednesday, rising to 6.30 percent Thursday. The development is slowing the inflow of capital into investment trust companies and discouraging trading in bonds rated BBB.

The stock market ended its February climb, with customer deposits falling 550 billion won in the first 10 days in March.

The gap in bond yields with different grades is also a cause for alarm, according to market watchers. The difference in the yields on the two investment grades of AA- and BBB- increased from 3.17 percentage points at the end of October to 5.03 percentage points at the end of February. "The increasing gap represents the wariness felt by financial institutions on corporate liquidity and the greater emphasis put on the concern for risk," an analyst with LG Economic Research Institute said. "Corporations with lower credit ratings will be hit if the capital market shows further instability, as it will get difficult for them to find takers for their bonds."

"Any signs of optimism must be supported by indications that economic activities are indeed picking up. Otherwise, the capital market is sure to react negatively given the current conditions," an official at the Bank of Korea said. "That will be indeed the case early next year as a large volume of corporate bonds that were acquired through the Korea Development Bank and the collateralized bond obligations mature," he said.

by Kim Kwang-ki

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