'MBS Demand Surges'—Investor Sentiment Shifts Dramatically as HF's 'Delayed Funding Strategy' Pays Off < Bonds/Forex < Article

(Seoul=Yonhap Infomax) Hye Rim Pi – Mortgage-backed securities (MBS) to be issued by Korea Housing Finance Corporation (HF) have attracted robust investor demand for the first time in months.

As market interest rates soared, the ceiling (upper end of the desired yield band) was raised, drawing heavy orders across most maturities.

Amid heightened risk aversion toward credit bonds following recent bond market volatility, HF focused on timing its issuance by adopting a 'delayed funding strategy.'

According to investment banking (IB) industry sources on the 24th, HF will issue a total of 800 billion won ($615 million) in MBS on the 25th.

The breakdown by maturity is as follows: 1-year at 60 billion won, 2-year at 120 billion won, 3-year at 110 billion won, 5-year at 140 billion won, 7-year at 110 billion won, 10-year at 110 billion won, 20-year at 120 billion won, and 30-year at 30 billion won.

On the 21st, HF set the spreads for this issuance through a competitive bidding process:

1-year: +33bp over same-maturity Korea Treasury Bonds (KTB)
2-year: +19bp
3-year: +18bp
5-year: +20bp
7-year: +54bp
10-year: +64bp
20-year: +71bp
30-year: +76bp

Most maturities saw ample orders. The 1-year tranche alone drew 440 billion won in bids. The 2-year attracted 420 billion won, 3-year 570 billion won, and 5-year 450 billion won, resulting in high oversubscription rates. The 7-year received 110 billion won, the 20-year 280 billion won, and the 30-year 80 billion won in orders. However, the 10-year saw demand of only 70 billion won, resulting in a minor undersubscription.

This marks a sharp contrast to the situation earlier this month. At that time, a spike in KTB yields dampened investor appetite for credit bonds, forcing some state-owned enterprises to accept double-digit spreads above market averages for similar maturities. Notably, Korea Electric Power Corp. (KEPCO) bonds faced significant weakness at auction, sending shockwaves through the market. HF also faced considerable pressure regarding its MBS issuance.

Amid heightened market volatility, previous MBS auctions had seen tepid demand. The day after KEPCO raised spreads at auction, HF was also scheduled to solicit investors for its MBS. Rather than pushing ahead, HF opted to delay its issuance.

From mid-last week, sentiment in the credit market began to recover. As the upward trend in KTB yields eased and the relative yield appeal of credit bonds increased, buying interest returned. MBS also became more attractive as the ceiling was adjusted to reflect the new market environment.

For this auction, HF set the following ceilings: 1-year at 45bp, 2-year at 30bp, 3-year at 30bp, 5-year at 35bp, 7-year at 54bp, 10-year at 64bp, 20-year at 95bp, and 30-year at 94bp. In contrast, ceilings at the end of last month were in the high teens, underscoring the recent rise in market rates.

A bond dealer at a securities firm commented, "With the higher MBS ceiling, the yield advantage over bank bonds became more pronounced, which drove institutional buying."

Amid strong demand, HF was able to set issuance spreads for all maturities except the 7- and 10-year tranches at least 10bp below the ceiling.

Another bond dealer noted, "The attractive ceiling fueled strong buying. Waiting for the right timing instead of rushing to issue two weeks ago proved to be a masterstroke."

phl@yna.co.kr

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Hye Rim Pi phl@yna.co.kr