South Korea's credit market showed relative resilience in July following the Bank of Korea's interest rate hike decision. Prior to the Monetary Policy Committee meeting, buying interest weakened amid concerns over rate increases, but some demand recovery emerged afterward. The stabilized won-dollar exchange rate improved institutional buying capacity, while higher absolute interest rate levels enhanced investment appeal. However, market participants remain cautious about declaring a full recovery, as strength remains concentrated in SK Hynix's large-scale purchases rather than reflecting broad-based market warmth. August back-to-back rate hike possibilities and renewed Middle East tensions continue to constrain investor sentiment through heightened government bond yield volatility.
AAA Public Bonds Issue Below 民평 Rates Amid SK Hynix Buying
According to investment banking industry sources on the 27th, most AAA-rated public bonds auctioned last week were issued at rates lower than 민평 levels. On the 20th, Korea Western Power and Korea South-East Power, classified as corporate bonds, issued all allocated volumes below the previous day's 민평 rates. Last week alone, Korea District Heating Corp (AAA) and Daejeon Urban Corp (AA+) showed spreads lower than 민평 rates. Korea Student Aid Foundation, which conducted募集 on the 22nd, set its 4-year bond at 3bp below the government-guaranteed bond of the same maturity. On the same day, Korea Expressway Corp募集ed its 5-year bond at 민평 rate levels for the same maturity. Most bank bonds continued issuance at rates below 민평. For financial bonds, AA-grade bonds generally issued at par (민평 level), while A-grade bonds issued below 민평 rates. This contrasts with last week's 3-year government bond yields, which generally rose and showed weakness.
Credit instruments also showed relative strength in the secondary market, revealing a resilient atmosphere. Industry sources analyzed that SK Hynix's sustained large-scale buying was the primary factor. The somewhat stabilized won-dollar exchange rate improved some institutions' buying capacity, supporting the atmosphere. The combination of rising government bond yields and widening credit spreads further enhanced absolute interest rate attractiveness, according to explanations. An IB official stated, "SK Hynix continues large-scale buying and interest rate levels have risen quite a bit, making it somewhat comfortable to invest," adding, "However, with recent government bond yields rising and showing hesitation, it's difficult to easily gauge the atmosphere at this point."
SK Hynix Purchases Drive Market Polarization with Partial Unsold Issues
Polarization following SK Hynix demand remains prominent. Not all issuances achieved complete sales amid the overall strong procurement trend for AAA bonds. On the 24th, Korea Housing Finance Corp's mortgage-backed securities (MBS) auction left 40 billion won of 2-year bonds unsold. Korea Western Power, which conducted an auction on the 20th, decided not to issue 10-year bonds, while Korea South-East Power decided not to issue 5-year bonds. A bond market official noted, "Investment demand has revived somewhat compared to before, but polarization driven by SK Hynix buying continues," adding, "Breathing room has opened up somewhat centered on places conducting large-scale issuances."
Back-to-Back Rate Hike Concerns and Middle East Tensions Weigh on Market
Future monetary policy direction also weighs on investor sentiment. A bond dealer at a securities firm stated, "Thanks to SK Hynix's buying, the credit market will hold up to some extent, but back-to-back possibility is a variable," adding, "If rates are raised consecutively through August, the possibility of additional hikes within the year will inevitably be priced in, potentially increasing credit market volatility." Additionally, rising tensions from the Middle East situation have further increased market volatility. A funding manager at an issuer expressed concern, "Recent reignition of the Middle East situation is raising market volatility, and the somewhat improved atmosphere in the credit market seems to be diluting."
FAQ
Q1: How did South Korea's credit market perform after the Bank of Korea's July rate hike?
A1: The credit market showed relative resilience following the July rate hike. Most AAA-rated public bonds issued last week were priced below 민평 rates, and credit instruments demonstrated strength in the secondary market, contrasting with rising government bond yields.
Q2: What role did SK Hynix play in the credit market during this period?
A2: SK Hynix conducted sustained large-scale buying that served as the primary support factor for the credit market. However, this created market polarization, as strength remained concentrated in SK Hynix purchases rather than reflecting broad-based demand, with some issuances like Korea Housing Finance Corp's 2-year MBS leaving 40 billion won unsold on the 24th.
Q3: What factors are constraining investor sentiment in South Korea's credit market?
A3: Investor sentiment faces constraints from the possibility of back-to-back rate hikes in August and renewed Middle East tensions. Market participants note that consecutive rate increases through August could lead to pricing in additional hikes within the year, potentially increasing credit market volatility.
