Market Where the 'Fire of Distrust' Does Not Extinguish Despite Flood of Supplies

CP Interest Rate Hits 4.63%, Highest This Year, More Than Double During COVID Period
Negative Sentiment on PF Securitization Persists, Capital Bonds Also Trading in 9% Range
"Too Early to Discuss Government Policy Effectiveness, Need to Watch Pace of US Rate Hikes"

[Asia Economy Reporter Minji Lee] The government is making every effort to stabilize the bond market by operating a liquidity supply program exceeding 50 trillion won, but the market response remains icy. According to the Seoul bond market on the 1st, the CP rate recorded 4.63% as of the 31st, marking a new yearly high once again.

Since the Lego Land ABCP (Asset-Backed Commercial Paper) payment guarantee refusal incident in Gangwon-do, the CP rate, which began to surge, has shown no signs of moving despite the government's large-scale liquidity support policies aimed at stabilizing the short-term funding market. Currently, the CP rate is continuously reaching record highs since the 2008 global financial crisis (7.26%). Compared to the rate level in March 2020 (2.2%) when the COVID-19 pandemic spread worldwide, it has more than doubled.

The credit market situation is not much different. As of the previous day, the 3-year unsecured corporate bond (AA-) rate was recorded at 5.58%, which is 3 percentage points higher than during the outbreak of COVID-19 (2.2%). Although it slightly declined from the rate level on the 21st (5.736%) before the government announced its large-scale liquidity support policy, it still fluctuates without a clear direction. The credit spread, which reflects corporate bond investment sentiment (the difference between the 3-year corporate bond rate with credit rating 'AA-' and the 3-year government bond rate), is also soaring. As of the previous day, the corporate bond spread reached 144 basis points, the highest level of the year.

At least government bond yields showed a downward trend. The 3-year government bond yield of 4.18% and the 5-year government bond yield of 4.26% fell by 0.31 percentage points and 0.43 percentage points respectively compared to the 21st. According to a bond management industry official, "As the government continuously announces market stabilization measures, benchmark government bonds (recently issued bonds) are finding some stability, but non-benchmark bonds are hardly traded," adding, "For credit and short-term bonds, since there are almost no buyers, the interest rate levels are hardly decreasing."

Despite the 50 trillion won liquidity supply program and the Bank of Korea actively stepping in to relieve funding shortages by expanding eligible collateral securities, market participants are hesitant to increase investment sentiment due to concerns over credit risk stemming from future interest rate hikes and economic recession. In particular, negative investment sentiment toward short-term securities (CP, electronic short-term bonds) securitized from real estate project financing (PF) is showing no signs of resolution amid anticipated real estate market downturns caused by interest rate hikes. In fact, the 'YK Wangji First Phase' short-term bond (ABSTB), which received the highest rating after Yuanta Securities (A1) committed to private bond underwriting, traded at a high interest rate in the 12% range in the secondary market with only 4 days remaining until maturity. Due to ongoing concerns about funding amid rising interest rates, high-quality capital bonds such as those from Woori Financial Capital and KB Financial Capital also traded at 9% interest rates. In January of this year alone, capital bonds were traded at levels of 1-2%.

Bond market insiders agree that while government policies may gradually open up trading, it will be difficult to expect a complete resolution by the end of this year. Ultimately, a signal that interest rate hikes have reached their end is necessary to create a turning point in market sentiment. In Korea's case, the final interest rate level is determined by the intensity of the U.S. policy rate hikes, so attention will need to be paid to what the Federal Reserve (Fed) will say about interest rate hikes at the Federal Open Market Committee (FOMC) meetings in November and December.

An anonymous bond management industry official said, "It is too early to judge the effectiveness of the policy as it has been less than a month since the government launched large-scale liquidity support, and since the support is larger than during COVID-19, the policy effects will be reflected over time," adding, "If the Fed signals a slowdown in rate hikes in December, market sentiment will gradually recover in conjunction with the effects in early next year."

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