Money Is Moving Into Stocks... The Bond Market Is Running Dry

As the 'money move' into equities continues, concerns are growing over supply-demand instability in the bond market. The KOSPI has been hitting record highs day after day, but funds are still flowing out of the bond market. On top of slower buying of credit bonds by banks, major public pension funds are also moving to reduce their bond allocations, raising expectations that companies will face heavier funding costs.
According to the investment banking industry on the 24th, the yield on the 3-year Korean Treasury bond stood at 3.745% on the 22nd. It had risen to 3.766% on the 15th, entering the 3.7% range. That is the highest level in about two years and six months, since Nov. 14, 2023, when it stood at 3.857%. Although the benchmark rate is lower than it was two years ago, market rates are instead returning to levels seen during the tightening cycle. A decline in bond prices means a rise in bond yields.
As stock markets remain strong, pressure from capital outflows in the bond market is pushing bond prices down and yields up. In particular, there are concerns that demand for credit bonds rated AA or lower could weaken. Banks are facing heavier regulatory burdens from risk-weighted assets (RWA) as Basel IV is introduced. Banks manage RWA closely to maintain their BIS capital adequacy ratio. Since the ratio is calculated by dividing capital by RWA, a larger denominator lowers the ratio. Financial authorities have recently been raising the RWA floor gradually, and that is said to be cooling investor sentiment toward credit bonds, which are treated as RWA.
The government's push for productive finance could also become a negative factor for the credit market. Banks are under pressure to allocate their limited capital capacity first to financing advanced industries such as AI and semiconductors, supporting venture firms and small businesses, and providing loans linked to policy finance, rather than simply investing in corporate bonds.
An official from the investment banking industry said, "Ultimately, banks' buying appetite for credit bonds rated AA or lower could gradually weaken." Major domestic public pension funds are also showing signs of reducing their bond allocations. In a recent report, SK Securities analyzed that a trend toward lower bond allocations is emerging in the asset-allocation process of major public pension funds.
khj91@fnnews.com Kim Hyun-jung Reporter