South Korea's credit market showed signs of recovery as Korea Electric Power Corporation (KEPCO) and Korea Housing Finance Corporation completed large-scale bond issuances, according to investment banking industry sources on the 6th. KEPCO raised 1.07 trillion won through a 2.9-year note at 4.065% and a 3-year note at 4.105%, while Korea Housing Finance Corporation sold mortgage-backed securities across all maturity segments including 5-year notes. The successful placements followed a 27-basis-point decline in 3-year Korean government bond yields from 3.953% on the 24th of last month to 3.677% the previous day, alongside stabilization in the dollar-won exchange rate and Middle East geopolitical conditions. Market participants attributed the improved sentiment to reduced reliance on SK Hynix as the sole demand source, as institutional buyers returned to the credit market amid more favorable external conditions.
KEPCO and Korea Housing Finance Corporation Complete Large-Scale Bond Issuances
KEPCO conducted a bond auction the previous day that raised a total of 1.07 trillion won across two maturities, according to investment banking industry sources. The offering consisted of 290 billion won in 2.9-year notes at 4.065% and 780 billion won in 3-year notes at 4.105%. KEPCO originally planned to issue 300 billion won and 800 billion won respectively but reduced the volumes slightly based on bidding results and rate outcomes. Market observers noted the 2.9-year maturity was approximately 1 basis point lower than comparable KEPCO bonds, while the 3-year notes priced 2 basis points below the previous day's market consensus for the same maturity. The 2.9-year non-standard maturity was interpreted as targeting SK Hynix demand.
Korea Housing Finance Corporation sold mortgage-backed securities across all planned maturities on the same day. The issuance volumes were 30 billion won for 1-year notes at government bond plus 26 basis points, 140 billion won for 2-year notes at plus 29 basis points, 190 billion won for 3-year notes at plus 27 basis points, and 120 billion won for 5-year notes at plus 25 basis points. Bid amounts reached 160 billion won for 1-year, 280 billion won for 2-year, 430 billion won for 3-year, and 410 billion won for 5-year maturities. The corporation set ceiling spreads at 46 basis points for 1-year, 37 basis points for 2-year, 34 basis points for 3-year, and 37 basis points for 5-year notes, but achieved substantially tighter spreads across all maturities. The 5-year issuance volume increased from 70 billion won in the previous auction to 120 billion won without absorption difficulties, contrasting with recent market conditions where demand concentrated only in maturities of 3 years or less.
Institutional Demand Reduces Market Reliance on SK Hynix
The presence of SK Hynix as a dominant buyer diminished as institutional buying capacity emerged in the credit market. Some issuers displayed cautious attitudes toward SK Hynix inflows, while cases appeared where the company failed to acquire allocations due to rate expectations, according to market participants. A bond dealer at a securities firm stated that overall market conditions including exchange rates, equities, and the Middle East situation became favorable for the bond market, reviving investment sentiment. The dealer added that this represents institutions refilling depleted portfolios rather than a trend-level rally, as funds have not yet flowed into major credit investment entities.
Supply-Demand Balance Improves Amid Reduced Bank Bond Issuance
Supply-side factors supported the improved market atmosphere. Industrial Bank of Korea reduced issuance for a period last month due to personnel season effects, while the volume of maturing bank bonds this month remained limited, creating credit market-friendly supply-demand conditions according to a bond dealer at a securities firm. The dealer noted that the rally that started around the 1.5-year segment gradually extended to the 3-year segment. Another dealer at a different securities firm observed that foreign investors' arbitrage trading incentives declined due to changing FX swap conditions, while institutional funds typically weaken after early-half-year execution, suggesting limited credit market strength. Caution persisted as the interest rate hike cycle just began, despite reduced uncertainty from the first rate increase and lower government bond yield levels.
