SEOUL: South Korean authorities are making preparations to re-mobilise a bond stabilisation fund in a bid to ease any credit crunch in local bond markets as political uncertainties at home and a rise in US interest rates threaten to spark market volatility.
Hours after the US Federal Reserve raised rates for the first time in about a year, South Korea's Vice Finance Minister Choi Sang-mok said on Thursday the government would "finish working level preparations by the end of this year", reassuring markets that the government would intervene to counter any sharp rise in market yields if needed.
The Bond Market Stabilization Fund, when deployed, will be used to buy corporate bonds and bank debentures to provide liquidity to debt-ridden companies.
The Financial Services Commission in 2008 had set up the fund following the global financial crisis, drawing up about 5 trillion won ($4.22 billion) from financial institutions to buy high-yield bonds.
The fund will have a budgetary ceiling of 10 trillion won, according to a finance ministry official.
"We are working on the list of participating institutions, portions of contributions to be made from each one of them. We will be ready to start bond purchases any time starting 2017 if necessary," a finance ministry official closely involved in the preparations said. He added contributions would be made from a group of financial institutions as-needed.
The debt market sell-off has caught policymakers by surprise and rattled markets since the victory of Donald Trump in the US presidential election last month.
The benchmark 10-year government bond is trading at 2.167 percent as of Friday, up from 1.671 percent on Nov. 9.
Kim Sang-hoon, a fixed-income analyst at KB Investment & Securities, said the fund could be used again if political uncertainties persist.
"The biggest risk right now is with the Park scandal. If the Constitutional Court drags on for a long period of time without ratifying parliament's decision - without making any decision, it could boost the overall sovereign risk," Kim said.
The nation's parliament voted to impeach President Park Geun-hye last week, suspending her powers amid a corruption scandal involving her and a long time friend.
The impeachment has to be upheld by the Constitutional Court, which has 180 days to make the ruling.
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