Corporate financing also on 'alert'…Financial authorities activate a 100 trillion won market-stabilization fund

Rates jump and investor sentiment freezes

Also considering injecting 10 trillion won into the stock market stabilization fund

As the situation in the Middle East intensifies, warning lights have come on for corporate fundraising as well. With inflation concerns growing amid rising oil prices, bond yields have surged and investor sentiment has rapidly frozen. Financial authorities decided to activate a market-stabilization program of up to 100 trillion won to prevent the shock from spreading across the broader bond market.

According to the Korea Financial Investment Association on the 4th, the three-year AA- rated corporate bond yield closed at 3.8% per annum. It rose 0.031% point from the previous trading day and, compared with the 27th of last month, jumped 0.163% point in just two trading days.

Concerns are mounting that a rapid rise in yields over a short period could disrupt corporate financing, including corporate bond issuance. Some warn that if the turmoil is prolonged, liquidity risks could intensify, especially among lower-rated firms. A financial authorities official said, "We are closely monitoring whether corporate bond refinancing becomes blocked or whether the gap (spread) versus government bond yields widens."

Some also point to weakening demand from traditional bond buyers such as banks and mutual credit cooperatives. An official at an asset management company said, "Due to the recent 'money move' into the stock market, large-scale deposits have flowed out of banks and mutual finance institutions," adding, "If deposit balances shrink, the funds financial institutions allocate to the bond market also decline." According to the Korea Financial Investment Association, securities finance companies and mutual finance institutions recorded net sales of 381.9 billion won worth of corporate bonds in January–February this year.

Financial authorities moved into emergency-response mode. Kim Byung-hwan, Chairman of the Financial Services Commission, convened an emergency financial market situation review meeting that day and instructed officials to "actively operate the currently running '100 trillion won + α' market-stabilization program." Of the 100 trillion won, up to 37.6 trillion won will be deployed for stabilizing the bond and short-term funding markets. Specifically, measures include a 20 trillion won bond market stabilization fund and a 10 trillion won program to purchase corporate bonds and commercial paper (CP). In addition, funds for a soft landing in real estate project financing (PF) could reach up to 60.9 trillion won.

As the stock market fell sharply over a short period, financial authorities are separately reviewing whether to deploy the stock market stabilization fund. The fund, totaling 10.7 trillion won, was established and has been maintained since the COVID-19 pandemic in March 2020. A financial authorities official said, "We will decide whether to deploy the stock stabilization fund depending on index levels." The last time the fund was deployed was during the 2008 global financial crisis.

Meanwhile, financial authorities are not considering the option of a "temporary ban on short selling." This is because it could have a negative impact on inclusion in the MSCI Developed Markets Index.

Seo Hyeong-gyo / Park Ju-yeon, reporters seogyo@hankyung.com