"Interest Rate Shock Returns" Freezing Corporate Bond Market

Credit Spread 73bp
Level Seen During 2020 COVID

This Month's Issuance Amount 4.3632 Trillion KRW
3 Trillion KRW Decrease Compared to Same Period Last Year
"Weakness to Continue Until Interest Rates Fall"

[Asia Economy Reporter Minji Lee] As the US adopts a ‘Giant Step’ (a 0.75%P hike in the benchmark interest rate at once), uncertainty over interest rates is increasing, leading to a prolonged off-season in the corporate bond market. The credit spread, which reflects the issuance environment of the corporate bond market, is already more severe than during the COVID-19 pandemic. Companies, feeling the burden of rising funding costs early on, are flocking to banks or issuing commercial paper (CP) to raise funds. Since all market attention is focused on interest rates, a visible decline in market interest rates is expected to be necessary for a turnaround in the corporate bond market sentiment.

According to the bond industry on the 20th, the credit spread stood at 73 basis points (bp) as of the previous day (1bp = 0.01%p). The credit spread is the difference between the 3-year corporate bond yield rated ‘AA-’ and the 3-year government bond yield; the larger the spread, the more difficult it is to issue bonds.

Compared to a month ago when the credit spread was 76bp, it appears to have narrowed, but this is a temporary state due to the replacement of government benchmark bonds, and it is more accurate to say the spread has actually widened. Considering that during the 2020 COVID-19 pandemic, when the corporate bond market froze sharply, the credit spread hovered around 75?80bp, it means companies trying to raise funds are facing as difficult a time as then.

As a result, corporate bond issuance volume has also significantly decreased. From the 1st of this month to the 17th, the issuance amount of corporate bonds was 4.3632 trillion KRW, with a net issuance amount of 1.417 trillion KRW. Considering that the issuance amount during the same period last year was 7.0136 trillion KRW, issuance demand has decreased by nearly 3 trillion KRW. Last month, the redemption amount exceeded issuance, turning into a net redemption of 594.1 billion KRW. This is due to companies postponing corporate bond issuance amid funding cost burdens and institutional investors’ previously ample wallets thinning, reducing their purchasing power. Industry insiders explain that despite the high interest rate appeal, it is difficult for institutions to buy bonds as bond funds have suffered large valuation losses due to the sharp rise in interest rates, and capital outflows continue.

Researcher Kyungrok Lee of Shin Young Securities said, "As corporate bond demand forecasts and issuance volumes decrease, some months are showing net redemptions," adding, "Large corporations are increasingly relying on bank financing, CP, and short-term bonds rather than corporate bond issuance." Amid this shift toward the short-term investment market, as of the 17th, the issuance amount of CP rated A1 (highest credit rating) was 10.814 trillion KRW, about 44% more than the 7.4862 trillion KRW issued during the same period last year.

The sluggishness in the corporate bond market is expected to continue for a long time. This is because high inflation is persisting, and the US Federal Reserve (Fed) is expected to take another Giant Step next month. The market anticipates the Fed will reach an interest rate of 3.5?3.75% by the end of the year, ultimately exceeding 4%. Researcher Eun-gi Kim of Samsung Securities said, "Since corporate bonds have lower liquidity compared to government bonds, investors have no choice but to be cautious," adding, "Until the uncertainty over monetary policy ends and a clear downward trend in market interest rates emerges, it will be difficult for corporate bond investment demand to recover."

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