Will home loan rates rise further? The bank bond surge and its ripple effects

Bank bond issuance has jumped so sharply this year that it has already surpassed the full-year total for 2025, even as the fourth quarter is only just beginning. The surge reflects a rise in maturing bonds coming due for refinancing, compounded by growing funding demand tied to the government's productive-finance policy push — and banks plan to keep issuing aggressively through the rest of the year.

The intensifying competition to place bonds is expected to push up lending rates across a range of loan products that use bank bonds as a benchmark. With market rates already climbing on inflation concerns, analysts warn that year-end book closing — when financial institutions wind down new transactions and square their positions — could steepen the rate rise further. Financial authorities have launched an emergency review of the situation.

Cumulative bank bond issuance this year reached 222.23 trillion won ($165 billion) as of Thursday, according to the Korea Financial Investment Association's bond information center. That figure has already eclipsed the full-year 2025 total of 221.61 trillion won, with a full quarter still remaining.

Issuance has risen across all major lenders. The four largest commercial banks — KB, Shinhan, Hana and Woori — had collectively issued 46.76 trillion won through Thursday, exceeding their combined full-year 2025 total by 3.2 percent.

The increase has been particularly pronounced at policy banks. Korea Development Bank, Export-Import Bank of Korea and Industrial Bank of Korea together issued 127.52 trillion won through Thursday, excluding government-guaranteed bonds — roughly 60 percent more than their combined full-year 2025 volume. These institutions raise funds through policy-bank bonds such as industrial finance bonds and small-and-medium enterprise finance bonds.

The primary driver of the surge is a rise in maturing bonds requiring refinancing. Total bank bond maturities across the sector reached 178.19 trillion won through Thursday, up 17.4 percent from the same period a year earlier. Banks typically handle maturing debt by rolling it over through new issuance.

Beyond the maturity wall, banks say funding demand to support the government's productive-finance initiatives has also contributed to the expansion in issuance. Policy banks in particular cite the productive-finance agenda as a direct factor.

Issuance is expected to remain elevated through the rest of the year. Bank bonds worth 69.18 trillion won are set to mature in the fourth quarter alone, and preemptive issuance demand is anticipated as banks seek to lock in funding before market rates climb further. If corporate settlement flows drain deposits at year-end, banks may also need to raise additional funds to manage their loan-to-deposit ratios.

KB Kookmin Bank, having exhausted its full-year issuance limit of 11 trillion won, has publicly disclosed plans to issue an additional 6 trillion won in bank bonds during the fourth quarter. Shinhan Bank and Hana Bank have also filed disclosure notices covering their issuance plans for the coming year and are actively placing bonds.

As the supply of bank bonds grows, upward pressure on their yields is intensifying. A larger supply forces issuers to offer higher rates to attract investors. Commercial banks note that the trend has been amplified this year by the surge in issuance from policy banks, which carry relatively high credit ratings — competing against them in the bond market requires offering a premium.

Year-end book closing adds another layer of uncertainty. Book closing refers to the practice of financial institutions and investors winding down new transactions and squaring their book positions ahead of year-end. Some market observers expect this year's book closing to arrive earlier than usual given elevated market volatility, which would further shrink the pool of buyers and intensify rate competition among banks.

Bank bonds serve as the benchmark rate for major loan products including unsecured household credit loans, mortgage loans and corporate loans. With macroeconomic uncertainty over inflation already pushing market rates higher, the added pressure from issuance competition is expected to increase the interest burden on borrowers. "There is an expectation that rates will rise going forward, so there will be demand to issue bonds preemptively while rates are still low," said Kim Jeong-sik, an emeritus professor of economics at Yonsei University. "As funding costs rise, lending rates could go up as well."

As bank bond issuance competition emerged as a source of instability in the bond market, financial authorities stepped in for a review. Earlier this month, regulators collected fourth-quarter issuance plans from banks and examined whether issuance was being concentrated in any particular period. They found the concentration was not severe enough to warrant the kind of intervention seen during the Legoland crisis, but said they would continue to monitor market conditions closely.

"We are asking banks to spread out their bank bond issuance as much as possible," a financial authority official said. "The fourth quarter, with book closing, is a period when rates tend to jump sharply — and since credit card company bonds could also be affected, we are watching the situation very carefully."

The government is also trimming its treasury bond issuance to help stabilize the bond market. It has decided to cut October's treasury bond supply by 5 trillion won from the originally planned amount, using surplus tax revenue to do so. The reduction in market supply is expected to help put the brakes on rising market rates. The government is also reviewing an emergency buyback of outstanding bonds.