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Corporate bond sales shrink on weak capex

South Korea's corporate bond sales have contracted sharply in 2016 from last year due to large firms' sluggish capital spending and rising interest rates, data showed Wednesday.

Local companies floated 35.1 trillion won ($30.1 billion) worth of bonds between Jan. 1 and Tuesday, while issuing only 264 billion won this month, according to the data by the Korea Financial Investment Association.

Given the current pace, corporate debt sales for all of 2016 are unlikely to surpass the 40 trillion won mark as companies are unwilling to issue bonds amid concerns over a possible US rate hike this month.

Last year, corporate bond sales came to 45.4 trillion won, down slightly from the 46.5 trillion won registered a year earlier.

Analysts attributed this year's slumping bond sales largely to big businesses' reluctance to invest in new plants and equipment amid slumping economic growth.

"The main culprit was a marked decline in large companies' facility investment," said Kim Seon-ju, a researcher at NH Investment & Securities Co.

Sales of corporate bonds with ratings of AA or above came to 27.7 trillion won, well below last year's amount of 35 trillion won, while junk bond issues edged up to 2.5 trillion won.

Also responsible were rising market interest rates. The yield on three-year corporate bonds with AA- ratings soared to 2.51 percent Tuesday from 1.67 percent in late September. "Corporate bond sales began to atrophy from October on worries about rising interest rates," said Hwang Se-woon, a senior researcher at the Korea Capital Market Institute.

Most market watchers predict the amount of corporate bond sales for 2017 to be similar to this year's level or decline.

"The domestic corporate bond market will likely be influenced by the pace of US interest rate hikes next year," Hwang said.

Weak corporate bond sales come amid the country's sluggish economic growth. The government has forecast the economy to grow 2.8 percent this year, but most private and state think tanks have offered lower targets. (Yonhap)

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