Ministry of Finance and Economy, 17issues Euron-denominated FX Stabilization Fund bonds with the lowest spread on record

The Ministry of Finance and Economy issued Euron-denominated Foreign Exchange Stabilization Fund bonds at spreads at the lowest level on record, confirming global investor confidence in Korean paper. The size of the issuance was the largest ever for euro-denominated FX Stabilization Fund bonds. 17-year and 3-year spreads versus euro mid-swaps were 7bp and 10bp, respectively, setting a new low for the same maturities.28.

FX Stabilization Fund bonds are foreign-currency-denominated bonds issued by the government in overseas markets. They serve as a Korean benchmark for domestic institutions and companies when raising funds abroad. A spread is the risk premium investors demand in addition to the benchmark rate in return for bearing the bond’s risk. A lower spread means overseas investors assessed the credit risk of Korean government bonds as lower.

The government said the significance of this issuance lies less in being a direct tool to curb the won-dollar exchange rate than in showing that foreign currency can be raised at low cost even in overseas markets other than the dollar. If the Ministry of Finance and Economy establishes a benchmark with a low spread, it could also become a positive reference point for follow-on issuers such as the Export-Import Bank of Korea, Korea Development Bank, public enterprises, commercial banks, and large companies.

The timing of this issuance is noteworthy. As the won-dollar exchange rate has recently continued its unstable trend at a high level, concerns about a strong exchange rate and external dollar demand were also raised in the National Assembly. The euro mid-swap is an interest rate benchmark based on the euro, and it served as the basis for calculating this spread. The key fact throughout the article is that, as the spread has narrowed, it is expected to help lower the foreign-currency funding costs of Korean issuers overall.