The Korean government issued 1.7 billion euros in euro-denominated Foreign Exchange Stabilization Bonds, the largest such issuance on record. The government also succeeded in lowering the spreads to all-time lows for the respective maturities, reaffirming the strong external creditworthiness of the Korean economy and its foreign currency funding capacity in international financial markets.
The Ministry of Finance and Economy said on the 9th that it successfully issued 1.7 billion euros (approximately $1.94 billion) in euro-denominated Foreign Exchange Stabilization Bonds on the 8th.
The bonds were issued simultaneously in two tranches: 700 million euros in three-year notes and 1 billion euros in seven-year notes. The three-year notes were priced at 2.981 percent, 10 basis points (1bp = 0.01 percentage point) over the three-year euro mid-swap rate, with a coupon of 2.875 percent. The seven-year notes were priced at 3.285 percent, 28 basis points over the seven-year euro mid-swap rate, with a coupon of 3.250 percent.
The issuance marks the government's largest-ever euro-denominated Foreign Exchange Stabilization Bond sale. The seven-year tranche in particular is the largest single tranche on record, surpassing the previous high of 750 million euros set in 2014. By establishing a firm benchmark in the euro market, one of the world's two dominant currencies alongside the dollar, the government expects overseas foreign currency funding conditions for Korean companies to improve.
Another positive outcome is that both the three-year and seven-year notes achieved the lowest-ever spreads for their respective maturities. Following the dollar-denominated Foreign Exchange Stabilization Bond issuance in February this year, the government broke last year's previous record lows in the euro market as well. Last year's euro-denominated bonds carried spreads of 25 basis points on three-year notes and 52 basis points on seven-year notes, but this time the spreads narrowed to 10 basis points and 28 basis points, respectively. That represents declines of 15 basis points on the three-year notes and 24 basis points on the seven-year notes from the previous lows.
The ministry explained that the spreads are lower than or on par with the secondary market spreads of similar-maturity bonds issued by major advanced economies, international organizations, and high-quality public sector issuers. The 28-basis-point spread on the seven-year notes is lower than the 35-basis-point secondary market spread of the Quebec provincial government, which holds the same credit rating as Korea, and the 35-basis-point secondary market spread of the Ontario provincial government. Since Foreign Exchange Stabilization Bond spreads serve as the benchmark for pricing overseas funding by domestic issuers, the tighter spreads are expected to lower foreign currency funding costs for Korean paper across the board.
Despite heightened market uncertainty stemming from rising tensions in the Middle East, investor demand remained solid, allowing the final pricing to come in 4 basis points below the initial guidance. The government said that ahead of the issuance, it actively briefed overseas institutional investors on Korea's economic growth strategies, including fostering the artificial intelligence (AI) industry and strengthening advanced manufacturing competitiveness. As a result, the three-year notes tightened from the initially offered 14 basis points over euro mid-swaps to 10 basis points, and the seven-year notes from 32 basis points to 28 basis points. The proceeds will be used to redeem 700 million euros in Foreign Exchange Stabilization Bonds maturing in October this year, among other purposes.
With this issuance, the government has fully used its Foreign Exchange Stabilization Bond issuance ceiling of $5 billion equivalent for this year, the largest annual amount on record.
"The government stably placed its full volume in both the dollar and euro markets this year while achieving record-low spreads, reaffirming global investors' solid confidence in Korean paper," a ministry official said. "Going forward, we plan to closely monitor international financial market conditions, maintain a stable foreign currency funding base, and steadfastly support the external soundness of our economy."
