South Korean financial authorities are reviewing plans to expand the Bond Market Stabilization Fund as financial market anxiety intensifies following the Middle East conflict. The move aims to preemptively prevent money market instability from spreading across the financial sector in preparation for worst-case scenarios.
According to financial industry sources on the 15th, the Financial Services Commission held a meeting on the 13th, chaired by the Financial Policy Bureau director, with related agencies to assess money market conditions and response measures.
The meeting reportedly discussed expanding the fund's operational limit beyond the current 20 trillion won ($14.4 billion). The Bond Market Stabilization Fund is a market stabilization mechanism where financial institutions including banks, securities firms, and insurers jointly contribute capital to purchase corporate bonds and credit card company bonds. It is called a "firefighter" in financial markets because it helps companies raise funds when bond markets seize up.
Industry analysts suggest authorities may increase the fund by 10 trillion to 20 trillion won. The FSC had previously reviewed expanding the fund from 20 trillion won to 30 trillion won during market turmoil caused by Taeyoung Engineering & Construction's workout application and the martial law incident.
Since the Middle East crisis began, bond markets have seen rapid increases in both government bond yields and credit instrument rates. According to the Korea Financial Investment Association, the 3-year Treasury bond yield rose from 3.041% on the 27th of last month—the day before the crisis—to 3.338% by the 13th of this month. Capital company bond yields in the secondary financial sector have also exceeded 4%.
Market observers forecast that prolonged Middle East tensions could push Treasury yields to around 3.7%. Shinhan Investment Corp. stated in a report released on the 13th: "In a worst-case scenario where Middle East tensions persist, the 3-year Treasury bond yield could rise to the 3.7% level."
If policy financial institutions including Korea Development Bank and Industrial Bank of Korea also expand their 10 trillion won corporate bond and commercial paper purchase program, the current 100 trillion won market stabilization program could grow significantly. An FSC official explained, "The situation doesn't yet warrant deploying the Bond Stabilization Fund, but we are preparing in advance with the possibility of expanded market instability in mind."
