Korea raises $1.3 billion via forex bonds

The government raised $1.3 billion by selling foreign exchange stabilization bonds at the second-lowest-ever rates despite heightened uncertainties in the global financial markets, the Finance Ministry said Thursday.

It sold US dollar-denominated bonds worth $500 million with a maturity of 10 years to yield 1.769 percent, 25 basis points more than US Treasurys and five-year euro-denominated bonds worth 700 million euros ($809 million) with a negative yield of 0.053 percent.

The bonds were issued at the second-lowest rates while the spread in the yield between the latest FX bonds and US, European benchmark bonds hit an all-time low. A lower bond spread implies a lower credit risk.

“The successful bond sale reaffirmed foreign investors’ trust toward the South Korean economy in the situation where uncertainty in the global financial market has been expanding due to potential US Fed tapering and China’s Evergrande crisis,” Finance Minister Hong Nam-ki said.

With some 50 institutions from the global capital market showing keen interest during an investor meeting, the US dollar-denominated and euro-denominated bonds have drawn orders for four times and six times the amount offered, the Finance Ministry said.

The country issued euro-dominated bonds with a negative yield for the second time. This means it will receive 71.9 million euros, which is more than the face value of 700 million euros, and can only repay the par value at maturity without paying interest.

By increasing the volume of foreign reserves through the bond program, Asia’s fourth-largest economy will be able to defend its financial and forex markets in the event of external shocks such as financial market instability from advanced countries and crises from emerging countries, according to the Ministry of Economy and Finance.

The forex bonds are sold to stabilize the value of the won in preparation for rapid exchange rate fluctuations due to internal and external market changes.

The country’s foreign exchange reserves hit a record high of $463.97 billion in September, up $40 million from the previous month, according to central bank data.

The euro-denominated bonds were the first green bonds issued by an Asian government, and designed to fund eco-friendly projects like renewable energy. The green bonds are expected to be listed on the London Stock Exchange upon the request of the UK government.

As the FX bond yields often serve as a benchmark for Korean bonds being traded in international financial markets, the interest rate on issuance of foreign bonds by the private sector will decrease accordingly, helping them reducing borrowing costs, Hong said.



By Park Han-na (hnpark@heraldcorp.com)