As long-term bond rates rise sharply, the South Korean government's 8·13 comprehensive real estate measures are emerging as a factor for increased supply of high-quality bonds, including corporate and bank bonds. Analysts warn that the combination of rising global long-term interest rates and domestic government bond supply pressures could exacerbate the burden on the bond market, especially with increased funding needs for housing supply.
According to the financial sector on the 25th, the Korea Land and Housing Corporation (LH) has issued bonds worth 11.2 trillion won this year, surpassing last year's total issuance of 9 trillion won. The net issuance, excluding maturities, is expected to exceed 10 trillion won in the near future.
The increase in LH bond issuance is driven by rising project costs for the construction of third-phase new towns and public housing. Additionally, the government's commitment to start construction on 1.35 million housing units by 2030, including over 230,000 units in the metropolitan area, is expected to further increase funding demands.
The Housing Finance Corporation (HUG) is also likely to increase its bond issuance. HUG's bond issuance this year is projected to reach 8.6 trillion won, exceeding last year's total of 6.2 trillion won. Under the 8·13 measures, HUG's guarantee supply for normal real estate project financing is set to expand from 3.7 trillion won last year to between 9 trillion and 13 trillion won annually over the next three years. This expansion, along with support for reconstruction, redevelopment, relocation loans, and policy products for young and actual homebuyers, is expected to increase HUG's external funding needs.
Bank bonds are also contributing to the supply pressure. The government has raised its target for household debt growth from 1.5% to 3% this year, creating an additional loan capacity of about 30 trillion won in the financial sector. If a significant portion of this is allocated to relocation and interim payments, the demand for bank funding will increase, leading to greater pressure for bank bond issuance.
Bonds issued by public institutions like LH and HUG, as well as bank bonds, are classified as high-quality securities. With the burden of government bond issuance increasing, a simultaneous rise in these bonds could lead to competition among limited institutional investors, driving up bond rates. If rates on high-quality bonds rise, the issuance rates for general corporate bonds may also increase, potentially raising corporate funding costs.
The key question is how much of the increased supply can be absorbed by investment demand. With the risk-weighted asset ratio for housing mortgage loans increasing this year, banks are expected to continue favoring low-risk assets like government bonds and certain public bonds. However, if government, public, and bank bond issuances all increase simultaneously, it may be challenging to absorb the entire volume with existing demand.
Kim Sang-in, a researcher at Shinhan Investment Corp., stated, “With the 8·13 measures, the roles of LH, HUG, KAMCO, and other public institutions are expected to expand, leading to increased bond issuance from these entities. The relaxation of household debt total management regulations will also exert pressure on the issuance of bank bonds, making it difficult to alleviate the burden of high-quality bond supply.”
* This article has been translated by AI.
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