Corporate Paper Interest Rates Fall for Two Consecutive Days... Bond Market Investment Sentiment Improves

Interest Rate at 5.52%... Some Expectation of Eased Investment Sentiment

[Asia Economy Reporter Minji Lee] As corporate paper (CP) interest rates decline, warmth is spreading in the bond market. Bond experts expect that the extremely contracted investment sentiment will somewhat improve. However, they also cautioned that volatility could increase depending on inflation and the ongoing trend of interest rate hikes.

According to the Bond Information System of the Korea Financial Investment Association on the 13th, the CP rate (91-day maturity) recorded 5.52% as of the morning, continuing a decline for two consecutive trading days. The previous day, it was 5.53%, down 0.01 percentage points from the prior trading day. After remaining steady around 3.13% on September 21, the rate surged to 5.54% due to the Lego Land payment guarantee refusal incident in Gangwon Province but has shifted to a downward trend after three months. This reflects the effect of the government’s large-scale liquidity supply policy aimed at stabilizing the short-term money market, which has brought stability to the CP market.

Corporate bond investment sentiment is also improving. Previously, interest rate reductions on corporate bonds were slow as attention was focused only on stable government bonds. However, as buying sentiment for top-tier rated bonds revived, the credit spread (an indicator of institutional investors’ corporate bond investment sentiment, calculated as the difference between the 3-year corporate bond rate with an AA- credit rating and the 3-year government bond rate) showed a downward trend. The credit spread was 174 basis points (bp) the previous day, down 5 bp from 179 bp on the 1st of this month. The 3-year unsecured corporate bond (AA-) rate also fell from 5.43% to 5.35%. Ji-sun Hwang, a researcher at Korea Asset Valuation, said, "Due to expectations of a slowdown in tightening and the implementation of financial market stabilization measures, investment sentiment in the bond market has recently recovered, leading to a narrowing of credit spreads." She added, "This week, SK Telecom is expected to issue corporate bonds worth 310 billion won, resulting in net issuance."

With the CP rate, which had been soaring, turning to a downward trend and corporate bond rates stabilizing, the market expects the interest rate decline to continue through the first quarter of next year. Individual investors are also increasing investments in corporate bonds and long-term exchange-traded funds (ETFs), betting on falling rates. Over the past 10 trading days, individual investors have purchased 12 billion won worth of the ‘TIGER Corporate Bond (A+ or higher) Active’ ETF, as well as significant net purchases of ‘KBSTAR KIS Government Bond 30 Years’ (8.3 billion won), ‘KODEX Bank Bond (AA+ or higher) Active’ (7.6 billion won), and ‘KBSTAR Corporate Bond (AA- or higher) Active’ (7.3 billion won).

Hwa-jin Lee, a researcher at Hyundai Motor Securities, forecasted, "Since the market tightened rapidly after the Lego Land incident, causing interest rates to rise quickly, bond rates are expected to trend downward through the first quarter of next year."

However, caution is warranted. The decline in bond rates has been driven by expectations that the interest rate hikes are nearing their end, but the interest rate trend could change abruptly. Attention should be paid to the Consumer Price Index (CPI) to be released on the 13th (U.S. local time) and the Federal Open Market Committee (FOMC) results on the 14th. The December FOMC is expected to raise rates by 50 basis points to slow the pace of hikes, but remarks that could stoke concerns about further rate increases are anticipated.

Jina Kim, a researcher at Eugene Investment & Securities, advised, "The Fed has recently been focusing on wage growth, and if the high level of wage increases does not subside, it will be difficult to justify expectations of rate cuts." She added, "Considering the widespread market expectation of a pivot (change in interest rate policy), caution is needed regarding the risk of rate hikes after the FOMC."

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