'Debt's Counterattack' Hits Bond Market... Credit Risk Expands Until Next Year

Credit spreads surge in the second half of this year
Major bond yields continue to rise
"Government market stabilization measures less effective than in the past"
Bonds once trusted for investment, now require 'watchful investing'

[Asia Economy Reporter Ji Yeon-jin] Since the default of the Gangwon-do Legoland asset-backed commercial paper (ABCP) in September, the bond market has been gripped by fear. Although the government has promised to supply liquidity exceeding 50 trillion won to stabilize investor sentiment, it is analyzed that the bond market has shifted from an era of 'trust and invest' to 'see and invest.'

On the 7th, the credit spread of the average interest rate by private bond rating agencies rose by 40 basis points from 110 a month ago to 151 as of the previous day. The credit spread is the interest rate difference between government bonds and corporate bonds, and an increase in the credit spread means that companies are finding it more difficult to borrow funds.

On that day, major bond yields started mixed. As of 9:20 a.m., the combined on- and off-market 2-year government bond yield rose by 2.8 basis points from the previous trading day to 4.273%, and the 10-year government bond yield also increased slightly by 0.1 basis points to 4.162%. Conversely, the 2-year government bond yield fell by 0.9 basis points to 4.173%. Following the previous day's surge in commercial paper rates to 4.94%, marking a yearly high, bond yields have generally continued to rise on this day as well.

Although financial authorities have injected more than 50 trillion won to improve investor sentiment, there is an analysis that this stabilization measure will be less effective than in the past. The current bond market tightening began as countries withdrew liquidity released to overcome the COVID-19 pandemic, accompanied by interest rate hikes, making fundraising difficult. Therefore, credit risk may expand until next year when the rate hikes end. Yoon Won-tae, a researcher at SK Securities, said, "Historically, economic booms fueled by debt are always accompanied by side effects," adding, "the counterattack of debt is starting now, and Korea, having experienced a real estate market boom since 2014, is concluding a 10-year cycle of expanding private debt derived from the real estate market. It is highly likely that the real estate market downturn experienced between 2011 and 2013 will cause insolvencies in construction companies, savings banks, and credit finance companies."

In particular, it has been pointed out that Heungkuk Life Insurance and DB Life Insurance further increased volatility in domestic and international financial markets by failing to execute the call on their hybrid capital securities. Ultimately, Heungkuk Life Insurance announced the day before that it would exercise the call option on $500 million worth of overseas hybrid capital securities scheduled for the 9th, but this appears insufficient to restore the weakened investor sentiment. Yoon Yeo-sam, a researcher at Meritz Securities, said, "(If we compare the market to a human body, even if all organs are healthy, death can occur if one blood vessel is blocked.) The market reflects and moves up to a base interest rate of 3.75%, but the actual decision must consider the conditions at the time. Although the domestic fundamentals are not yet at a critical stage, the slowdown trend is clear."

Credit risk is expected to continue for the time being. Lee Jae-hyung, a researcher at Yuanta Securities, explained, "Unlike in the past, the current expansion of credit risk is led by rising credit premiums of high-quality public and bank bonds and financial institutions, which is driving credit risk across the market." He added, "This indicates that concerns about individual companies' fundamentals are not the main burden on the credit market; rather, the worsening liquidity conditions in the market and the resulting shortage of bond demand are significantly expanding the risk."

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