Credit bond issuance swelled to a record high in the second quarter of this year, led by bank bonds, intensifying supply pressure in the market. While issuance pressure is expected to ease somewhat in the second half compared with the second quarter, analysts say investors should selectively invest in top-grade corporate bonds, as upward pressure on interest rates and supply pressure from top-tier bonds are set to continue.
According to the Korea Financial Investment Association Wednesday, credit bond issuance in the second quarter reached 165.9252 trillion won, a record high on a quarterly basis. The figure combines special bonds (public corporation bonds), bank bonds, other financial bonds, and corporate bonds. Net issuance over the same period also reached 32.8885 trillion won, the largest scale since 2020, when COVID-19 broke out.
The main drivers behind the sharp expansion of supply pressure across the credit market were top-tier bonds such as special bonds and bank bonds. In the second quarter of this year, special bond issuance amounted to 33.1117 trillion won and bank bond issuance to 76 trillion won, with the combined issuance of the two categories alone reaching 109 trillion won. Kim Sang-in, a researcher at Shinhan Securities, noted, "In the case of public corporation bonds, funding demand is high across public institutions in general, rather than being concentrated in specific institutions."
Public corporation bonds surged as real estate, policy finance, and energy-related issuance overlapped. This year, net issuance of 18.4 trillion won was planned in the real estate sector, including the Korea Land and Housing Corporation (LH), Korea Housing Finance Corporation, and Korea Expressway Corporation. Mortgage-backed securities (MBS) issuance in the first half alone reached 9.3 trillion won, approaching last year's annual issuance of 10.7 trillion won. On top of this, pressure to issue Korea Electric Power Corporation (KEPCO) bonds added to the mix, driving a concurrent expansion in issuance by local public enterprises, federations, and financial public enterprises. In particular, concerns over increased KEPCO bond issuance in the second half are resurfacing amid rising oil prices and the entry into the peak power demand season in the third quarter.
Bank bonds also drew attention for their supply burden due to increased issuance of specialized bank bonds following expanded support for productive finance. In the case of commercial bank bonds, issuance was limited through the middle of the second quarter this year due to the impact of capital ratio and risk-weighted asset management. However, the prevailing view is that rising mortgage loans and the expansion of credit loans driven by the stock market surge led to large-scale net issuance last month. Corporate bonds saw 32.1464 trillion won issued, but redemptions also reached 30.4101 trillion won, leaving net issuance at just 1.7362 trillion won.
In the second half, supply pressure is expected to ease somewhat compared with the second quarter. However, as the outlook for a base rate hike is prevalent, the resumption of corporate bond issuance is predicted to come early next year. Kim Eun-gi, head of the global bond team at Samsung Securities, forecast, "The corporate bond net redemption trend will continue in the second half as well, so the sluggishness in the issuance market is expected to persist."
