The Bank of Korea: "Weak Corporate Bond Issuance... Credit Caution Remains"

Bank of Korea's '2020 First Half Financial Stability Report'
Credit Risk Boundary Expansion... Increased Uncertainty Risk in MMF and RP Markets

[Asia Economy Reporter Jang Sehee] The Bank of Korea stated that the issuance of non-investment grade corporate bonds (below A rating) in the credit bond market remains relatively sluggish. Although conditions are improving due to market stabilization measures being implemented, credit caution persists mainly around non-investment grade bonds.

On the 24th, the Bank of Korea analyzed the recent financial market situation following market stabilization measures in the '2020 First Half Financial Stability Report' approved at the Monetary Policy Committee meeting.

The Bank of Korea emphasized the need for continuous close monitoring, as the credit bond market could become unstable again if the real economy deteriorates significantly due to factors such as the resurgence of COVID-19 or escalating US-China tensions.

Since the government and the Bank of Korea's market stabilization measures, including the Bond Market Stabilization Fund launched in April, the expansion trend of credit spreads has significantly slowed, the Bank of Korea diagnosed. Before the Bond Market Stabilization Fund was activated on April 1, bonds were mostly of AA- or higher investment grade, but it was decided to include corporate bonds of fallen angel companies, which were downgraded to A+ afterward, as eligible for the fund’s purchases. This reflects the ongoing credit rating downgrades caused by COVID-19.

The Bank of Korea analyzed, "The Bank's full allotment RP purchases and the introduction of the Financial Stability Special Loan Scheme also contributed to easing credit caution."

Due to the Bank of Korea and government’s market stabilization measures, commercial paper (CP) rates have fallen, and issuance balances have turned to net issuance since May. The short-term financial market refers to the market where instruments with maturities within one year such as call loans, CP, RP, negotiable certificates of deposit (CD), and short-term bonds are traded. The CP rate peaked at 2.24% on April 2, the highest of the year, then dropped to 1.62% by the end of May. Issuance balances shifted to net issuance as issuance slightly exceeded redemptions.

Money Market Funds (MMF) sharply decreased due to fund withdrawals amid concerns over CP defaults but have recently shown an increasing trend again. Call and RP markets have maintained a generally stable flow due to active liquidity supply, the Bank analyzed.

The Bank of Korea explained, "If credit caution spreads again due to international financial market instability, there is a risk that uncertainty could transfer to short-term financial markets such as MMF and RP markets." It added, "Considering purchase demand within the market, the high proportion of top-tier ratings (A1), and plans to establish corporate bond and CP purchase institutions, there should be no significant problems with refinancing issuance in the CP and short-term bond markets for the time being."

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