The South Korean government will reactivate a 10-trillion won ($8.5 billion) state fund instrumental for corporate bond purchases to slow the rise in market yields and smooth liquidity for individuals and companies as market rates have shot up on sharp rise in U.S. rates on expectation for full-fledged tightening cycle in the United States.

“We will take pre-emptive actions (to stabilize the bond market) because individuals, companies, and financial institutions will be hurt if bond yields and lending rates continue in upswing spiral,” said Financial Services Commission (FSC) Chairman Yim Jong-yong in a press conference on Thursday. Yim is also nominated as the deputy prime minister for economy doubling as the finance minister.

The so-called bond market stabilization fund was first created in 2008 to provide liquidity to financially-stressed companies following the 2007-2008 global financial crisis. The fund with a budgetary ceiling of 10 trillion won ($8.5 billion) purchased high-yield bonds and repackaged them as primary credit facility backed by guarantees by state institutions.

The facility has arrangement with 90 financial institutions and could pool in up to 10 trillion won from them. The financial authority plans to extend the credit line beyond 10 trillion won.

Yim declined to share the timetable of the bond-purchase program as it could affect the market.

“We will take resolute action upon market and yield conditions,” he said.

Bond yields have shot up following the U.S. market as it braced for inflationary pressure from pledged $1 trillion infrastructure spending from the incoming Donald Trump administration and imminent hike in interest rates from the U.S. Federal Reserve starting December.

The benchmark 10-year government bond on Thursday reached 2.2 percent, up from 1.67 percent on November 9 after the U.S. election result. The yield on unsecured three-year BBB- corporate bonds closed Thursday at 8.28 percent, shooting up from pre-election 7.94 percent.

By Chung Seok-woo

[ⓒ Pulse by Maeil Business News Korea & mk.co.kr, All rights reserved]