Increasing Corporate Bond Issuance and Delaying Investments... A New Year Strained by Tightening Measures

Loss of Early-Year Effect Amid Interest Rate Uncertainty
Concerns Over Supplementary Budget Also Negatively Impact Institutional Investor Sentiment

[Asia Economy Reporter Minji Lee] As the U.S. Federal Reserve (Fed) shifts to tightening, increasing interest rate uncertainty, the early-year effect in the corporate bond market (credit spread narrowing) is fading. While companies are postponing investments and observing the market, demand from companies seeking to raise funds as cheaply as possible continues, increasing the burden on the corporate bond issuance market.

According to the bond evaluation industry on the 8th, the credit spread (the difference between the 3-year corporate bond yield with AA- credit rating and the 3-year government bond yield; a larger figure indicates a more difficult issuance environment), which gauges corporate bond investment sentiment, stood at 58bp (1bp=0.01%p) as of the 7th. The credit spread, which had surged to around 62bp due to institutions closing their wallets early amid year-end interest rate hike concerns, seemed to stabilize by mid-last month, narrowing to 55bp, but has expanded again to around 60bp this month.

This is due to a sharp contraction in institutional investment sentiment as concerns over interest rate hikes have expanded more than market expectations. Last month, expectations rose that an early-year effect could appear based on abundant institutional liquidity, but with the Fed mentioning a rate hike in March, even the Bank of Korea's Monetary Policy Committee's rate hike policy has become unpredictable.

Concerns over a large-scale supplementary budget (Chugyeong) emerging just before the presidential election are also negatively affecting institutional investment sentiment. If the scale of the supplementary budget expands in reality, it will stimulate supply pressure in the government bond market, inevitably causing government bond prices to fall (and government bond yields to rise).

Although institutions are postponing investments, corporate issuance demand remains strong. As a result, the issuance market is expected to experience supply pressure and difficult times for the time being. The expected net issuance scale this year is around 55 trillion won. The net issuance of corporate bonds last month was 6.8 trillion won, accounting for 12% of the total expected issuance volume. This month, more companies are expected to enter the corporate bond market than last month, with net issuance expected to reach around 8 to 9 trillion won.

Kim Eun-gi, a researcher at Samsung Securities, analyzed, "The corporate bond issuance volume last month increased by about 2.3 trillion won compared to the January average since 2015 (4.5 trillion won), and considering that March is the time for companies to submit annual reports, issuance volume is expected to increase significantly in February as well," adding, "Due to supply pressure and weak corporate bond demand caused by increased volatility in government bond yields, credit spreads are expected to continue widening."

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