South Korean banks continue to issue large volumes of bank bonds despite a rebound in deposits driven by stock market volatility, raising concerns that the surge in high-grade debt issuance is crowding out demand for lower-rated corporate bonds.
According to the Korea Financial Investment Association (KOFIA) on Monday, net bank bond issuance reached 2.93 trillion won ($1.91 billion) so far this month. Banks have maintained net issuance since March, with the monthly figure peaking at 8.87 trillion won in June. Net issuance refers to the amount of new bond sales after subtracting maturing debt.
Market observers had expected bank bond issuance to slow as a correction in the stock market prompted investors to shift money back into bank deposits. However, banks have continued issuing bonds after facing funding pressure earlier this year as deposits flowed into equities during the stock market rally.
Net bank bond issuance has reached 18.14 trillion won this year, already equivalent to 69.3 percent of the total net issuance recorded in all of last year.
The increase in highly rated debt, including bank bonds, has raised concerns that demand for lower-rated credit products such as corporate bonds could weaken as investors favor safer assets.
The corporate bond spread, a key measure of credit risk calculated as the yield gap over government bonds, has widened from 52 basis points at the beginning of the year to around 70 basis points, reflecting growing investor caution.
By Oh Gwui-hwan and Minu Kim
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