KEPCO Bond Yields Hit 34-Month High... Soaring Interest Burden Threatens Power Grid Investment

The yield on Korea Electric Power Corporation (KEPCO) bonds (three-year maturity) is nearing 4.5%, reaching its highest level in 2 years and 10 months. While KEPCO is expanding its power grid to supply electricity for the semiconductor and data center industries, electricity rates remain frozen, and the special provision that increased KEPCO bond issuance limits is scheduled to expire at the end of next year. As a result, there is growing concern over the burden of securing investment funds.

According to the Korea Financial Investment Association and KEPCO on September 21, the yield on three-year KEPCO bonds stood at 4.434% as of September 18. It climbed as high as 4.463% on September 15, marking the highest level since November 14, 2023 (4.482%), a span of 2 years and 10 months. The yield, which rose from around 2.5% in May 2023 to the 4% range by May this year, is now approaching 4.5% this month. This uptrend in domestic bond yields has occurred against the backdrop of rising U.S. Treasury yields and surging international oil prices. This month, the yield on 10-year U.S. Treasuries intraday surpassed 5%, and international oil prices exceeded $100 per barrel.

This month, the yield on 10-year U.S. Treasuries exceeded 5% intraday, and international oil prices also rose above $100 per barrel. The prolonged Middle East conflict has led to higher oil prices and inflation concerns, which in turn have pushed up long-term interest rates. Additionally, the possibility of further tightening by the U.S. Federal Reserve is being discussed, contributing to increased upward pressure on domestic bond yields.

There are immediate concerns that a large volume of KEPCO bonds flooding the market at high interest rates could induce a “crowding out” effect for private corporate bonds. As KEPCO bonds, with their AAA rating and quasi-government status, offer annual yields in the 4.4% range, a significant amount of institutional investors’ capital is being drawn toward them. In contrast, ordinary corporate bonds, which have relatively lower credit ratings, may face a lack of investor interest, resulting in under-subscription or being forced to offer even higher yields to raise funds. This would trigger a sharp increase in private companies’ interest burdens and deter investment, with the potential side effect of driving up overall market interest rates.

KEPCO also faces the challenge of pursuing major power grid investments and capacity expansions while electricity rates remain frozen. On this day, KEPCO decided to keep the fuel cost adjustment rate for the fourth quarter at KRW 5 per kWh. As of the end of June this year, KEPCO’s total debt stood at KRW 210.7 trillion, with daily interest payments of about KRW 11.5 billion. As of the end of last month, the company had issued a cumulative total of KRW 12.21 trillion in KEPCO bonds.

Furthermore, a contraction of the KEPCO bond issuance limit is planned. In principle, KEPCO’s bond issuance cap is twice the sum of its paid-in capital and reserves, but this was temporarily raised to up to six times the sum until the end of 2027 to cope with large deficits in 2022. As KEPCO has stated it does not intend to seek an extension of this temporary measure, securing sufficient resources for large-scale power grid investments within the original limit remains a challenge. Kang Sungjin, professor of economics at Korea University, commented, "Fundamentally, it is necessary to reduce incentives for bond issuance by raising electricity rates."

This content was produced with the assistance of AI translation services.