Korea Looks Offshore to Avert Bond Glut Amid Record MBS Issuance

South Korea is considering selling mortgage-backed securities overseas as record issuance of the notes risks swamping the local bond market and driving up borrowing costs.

“We wouldn’t rule out offshore issuance,” Sohn Byung Doo, head of the financial policy bureau at the Financial Services Commission said in an interview in Seoul Wednesday. “A narrowing yield gap and currency risks make this option less attractive now, but we will tap demand if needed.”

The state-backed Korea Housing Finance Corp. plans to more than double sales of bonds backed by home loans to 31.7 trillion won ($29 billion) this year as policy makers encourage households to refinance mortgages into fixed-rate, amortizing products. South Korea’s 10-year bond yield jumped 47 basis points in the past month amid concern there will be an oversupply of longer-dated notes as the government also increases issuance to fund its fiscal stimulus.

Sohn, 50, said the sales won’t weigh on the market too much as issuance plans are coordinated with the Finance Ministry’s treasury department, which schedules government bond auctions.

The government plans to increase sovereign-debt sales by 5.3 percent to 102.7 trillion won this year as it seeks to revive growth in Asia’s fourth-largest economy. Monthly average issuance will be 8 trillion to 9 trillion won, the Finance Ministry said in December.

“I’m not saying that the issuance plans had no impact on the market, but broadly speaking, the global yields were moving in the same direction,” Sohn said in his office.

Yield Premium

The 2.57 percent yield on 10-year South Korean government bonds is 28 basis points higher than on similar-maturity U.S. Treasuries. The spread averaged 48 basis points over the past 12 months. Three-month implied volatility in the won, a gauge of expected exchange-rate swings used to price options, is the third-highest in Asia at 9.34 percent, data compiled by Bloomberg show.

While the mortgage refinancing enabled by through Korea Housing Finance will reduce interest-rate risk for households, they could push yields higher. The 10-year yield jumped 14 basis points on Tuesday, the most since June 2013.

South Korea’s household debt reached a record 1.09 trillion won at the end of 2014 on expansionary policies, including two interest-rate cuts last year, Bank of Korea data show. The increase of 29.8 trillion won in the final quarter was the biggest since the central bank started compiling data in 2002. The BOK further lowered benchmark borrowing costs to a record 1.75 percent in March.

Sohn is a graduate of Seoul National University and has a Ph.D in economics from Brown University. Prior to joining the regulator in 2013, he was a director of the finance ministry’s international finance policy bureau and its G-20 team.

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