Government may intervene on faltering bonds

Korea’s government and central bank may step in to bolster the nation’s faltering corporate bond market as surging yields spur losses for investors and securities firms while sales stagnate.

Benchmark yields for three-year AA-rated corporate notes rose 43 basis points to 3.31 percent last quarter, the biggest increase in almost five years, after the U.S. Federal Reserve laid out a plan to dial back record stimulus. Note sales since July 1 of 120 billion won ($105 million) compare with an average 713 billion won each week in the first three months of 2013, data compiled by Bloomberg show. Issuance fell to 7.43 trillion won last quarter, the least since the third quarter of 2008.

Korea spent 5 trillion won helping businesses fund themselves when markets slammed shut in the wake of the 2008 collapse of Lehman Brothers Holdings, as officials sought to shield the nation from a global recession. This time round, the government will probably help companies that are suffering as expansion in Asia’s fourth-largest economy slows, including those in shipbuilding, construction and steel, said Park Cheong-ho, a credit analyst at Dongbu Securities.

“The volatility of yields has soured investor sentiment for bonds,” Park said by phone on July 3. “The biggest problem lies with bonds issued by companies in certain industries that are struggling.”

The government and central bank plan to provide a combined 700 billion won of financial support to Korea Credit Guarantee Fund to help it guarantee as much as 14 trillion won of corporate bonds, the Korea Economic Daily reported yesterday, citing an unidentified government official. The measure will be announced on July 8, according to the report.

“We are considering steps to stabilize the troubled bond market,” Financial Services Commission Chairman Shin Je Yoon said at a briefing on June 27. “It is time to come up with a stabilization method. However, we are still weighing the amount, method and timing.”

Yields in Korea surged after Fed Chairman Ben S. Bernanke said on June 19 the central bank may end bond purchases by the middle of next year, mirroring routs in global debt markets. The 10-year government bond yield rose from 2.85 percent on May 9 to a 13-month high of 3.69 percent on June 24. It was at 3.50 percent as of 11:05 a.m. in Seoul yesterday.

“Interest rates have a significant impact on investments,” Finance Minister Hyun Oh-seok said to reporters on June 27. “We are putting in efforts to stabilize the treasury bond and have a scenario planned.”

The increased volatility may force many issuers to postpone debt sales, said Daewoo Securities’ fixed-income analyst, Yoon Yeo Sam.

KB Financial Group delayed its planned 350 billion won bond issuance, originally scheduled for June 28, due to recent market developments.

SK Energy, the oil refiner, is the biggest issuer of Korean company debt this year, raising 710 billion won, Bloomberg-compiled data show. Units of steelmaker Posco raised 700 billion won, the data show.

The yield on SK Energy’s May 2020 notes surged to 3.69 percent on July 3, from 2.93 percent when the bonds were sold in May, according to NICE pricing data.

Bloomberg