[Square] The Meaning Behind US-Korea Decoupling in the Credit Market

Changmok Lee, Head of Research Division, NH Investment & Securities

In the financial market, the credit market is used in various contexts, but generally refers to the corporate bond or financial bond market.

The spread reflected in the interest rates during the issuance and circulation of corporate bonds and financial bonds (the difference in interest rates between government bonds and corporate bonds of the same maturity) is determined by various factors such as the risk of the issuing company, the impact of systemic risk across the entire market, and market supply and demand.

Especially during unstable times in the capital market like the recent COVID-19 pandemic, investors' interest in credit spreads increases more than usual. Not only bond investors but also stock investors become highly sensitive to credit spreads. This shows how important this indicator is.

An expansion of the spread can be interpreted as an increase in the risk of the corresponding bond. Naturally, spreads have been wider recently compared to normal times. However, looking at the changes in the Korea-US credit spreads after the COVID-19 outbreak, there is a clear difference between the two countries.

The US credit spread has significantly narrowed since mid-March, when the COVID-19 crisis began to seriously impact the financial market. The average spread of US investment-grade (IG) corporate bonds (generally A-rated) rose from around 70-80bp (1bp = 0.01%) at the beginning of the year to 310bp amid concerns of credit crunch due to the economic crisis caused by COVID-19, but has since narrowed to 160bp thanks to various stimulus measures by the US government and the Federal Reserve (Fed). Even the high-yield (speculative grade) energy company bond spreads, which had surged from about 500bp before COVID-19 to 2270bp due to the sharp drop in oil prices and the risk of credit crunch among shale oil producers, have recently narrowed to 1260bp. This indicates that the US corporate bond market’s credit crunch concerns have been largely alleviated.

Unlike the US, the Korean credit market has not yet shown a numerical decrease in risk. This contrasts with most risk assets such as the stock market, which have recovered in a 'V' shape. The domestic corporate bond spread (based on AA rating) has continuously widened from around 40bp at the beginning of the year to about 75bp currently. Although the spread for the highest AAA-rated corporate bonds has stabilized, spreads for most other ratings have expanded. The current credit spread is at its highest level since 2012.

So, what does this difference between the Korea-US credit markets mean? First, it indicates that the Korean credit market remains unstable. The effects of policy measures such as bond purchases by the bond stabilization fund and loans to non-bank financial institutions by the Bank of Korea after the COVID-19 outbreak have not yet been fully reflected.

It can also be interpreted as a possibility of corporate insolvencies and consequent industrial restructuring in the next one to two years. The ongoing downgrades of corporate credit ratings are not unrelated to this. Because risks still persist, issuance is mainly focused on higher ratings of AA or above and short-term maturities.

The direction of the Korean credit market spread, currently at a high level, will be determined by the speed of economic recovery, policy responses, and corporate self-help efforts. Credit market spreads are an indicator that investors and companies should continue to watch closely.

Changmok Lee, Head of Research Division, NH Investment & Securities

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