CP Interest Rate Surpasses 4.9%... "Consider Credit Risk Over Tightening"

Last Week's Highest in 13 Years 10 Months
Market Recorded 4.92% on the Morning of the 7th
Credit Market Anxiety Persists
Factors Including Heungkuk Life's Call Option Non-fulfillment Affecting

[Image source=Yonhap News]

[Asia Economy Reporter Hwang Yoon-joo] The corporate paper (CP) interest rate has once again reached a new high, approaching 5%. In the bond market, while tightening policies to curb inflation are important, experts advise shifting attention to credit risk.

According to the Korea Financial Investment Association on the 7th, the A1-grade CP (91-day maturity) interest rate recorded an annual rate of 4.92%, up 0.04 percentage points (p) from the previous trading day. This is the highest level in 13 years and 10 months since January 15, 2009 (5%). It surpassed the previous record high of 4.88% set the day before.

Concerns in the CP market are becoming serious. Yoon Yeo-sam, a researcher at Meritz Securities, explained, "There were reports of possible lawsuits involving financial institutions related to the ABCP repayment in Gangwon Province scheduled for mid-December, and last week’s events such as insurance companies delaying call options showed difficulties in funding conditions." He added, "Although the call option event was a measure decided after communication with policy authorities, it again shook the credibility of the credit market."

Earlier, Heungkuk Life Insurance announced it would not exercise the call option (early redemption) on $500 million worth of hybrid capital securities. Hybrid capital securities, which mature in 10 or 30 years, typically include a ‘call option’ allowing investors to redeem principal after 5 years. Therefore, investors generally perceive them as 5-year bonds. Although the call option had been a customary practice, it was broken for the first time in 13 years since 2009. Subsequently, DB Life Insurance also decided to delay the call option with investor agreement, increasing the likelihood that other insurers may also fail to exercise call options.

Considering market conditions, voices are growing that caution should be exercised more toward the spread of credit risk than inflation. Researcher Yoon said, "Credit events occurring in the fourth quarter have adversely affected the short-term funding market, raising concerns," and explained, "Compared to appropriate liquidity conditions after COVID-19, current call and repo rates have widened the gap with the base rate, and short-term interest rates have been more than 10 basis points higher over the past two months, making funding conditions unfavorable."

He added, "I do not agree with the argument that another big step hike should be taken at the Monetary Policy Committee meeting scheduled for November," emphasizing, "If the foreign exchange market burden is not significant, interest rates as an endogenous variable should focus more on the spread of credit risk."

He further pointed out, "Concerns about construction companies related to over 100 trillion won in project financing (PF) exposure due to fears of a real estate market slowdown until next year are connected to corporate bonds, so despite concerns about high yields and the foreign exchange market, a ‘big step’ (50 basis point hike) would be a heavy burden."

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