Expectations for Interest Rate Cuts Rise... Corporate Bonds Also at 6-Month Low

Falling to Early 4% Range... Approaching 3% Range
Growing Expectations of Interest Rate Cuts Bring Warmth to Bond Market

Interest rates on specialized finance company bonds, which reached 5% in mid-year, are showing signs of dropping to the 3% range for the first time in six months. As the timing of the U.S. Federal Reserve's (Fed) rate cuts approaches, optimism is being reflected in the bond market. This is a silver lining for credit card companies, which had been facing only gloomy news amid soaring funding costs.

According to the Korea Financial Investment Association's Bond Information Center on the 14th, the interest rate on specialized finance company bonds (AA+, 3-year maturity) stood at 4.094% as of the previous day. On the 12th, it recorded 4.090%, marking the lowest level in six months since June 2 this year. It is approaching re-entry into the 3% range for the first time since May. This is interpreted as being influenced by growing expectations of a Fed rate cut in the U.S. The Federal Open Market Committee (FOMC) meeting held early that day in Korean time is expected to further accelerate this trend.

On the 13th (local time), the Fed decided at the FOMC to maintain the benchmark interest rate at 5.25?5.50% per annum. This marks the third consecutive hold following September and November. The dot plot indicating rate projections forecast the rate to be 4.6% by the end of next year, which is 0.5 percentage points lower than the September projection. This reflects a shift in stance, suggesting that the number of rate cuts next year could increase from two to three. Essentially, it signals the end of the tightening cycle. Fed Chair Jerome Powell also indicated during the press conference that attention is being paid to future rate cuts. Ji-Young Han, a researcher at Kiwoom Securities, explained, "While the last FOMC emphasized further tightening, this time the Fed has shifted its focus toward rate cuts, even stating that discussions on rate cuts have begun."

With the stabilization of specialized finance company bond rates, credit card companies are feeling relieved for the first time in a while. Rate stability can positively impact both the profitability and asset soundness of the credit card industry. Since card companies, which lack deposit functions, mainly raise funds through specialized finance company bonds, the easing in the bond market could reduce the previously soaring funding costs. This is rare good news amid the worst performance in the third quarter this year and ongoing regulatory pressure for cooperative finance.

However, some caution that it is too early to be fully reassured. Bonds issued during the low-interest period still have lower rates than current market rates, and the pace of rate cuts is expected to be gradual, so it will take time to completely resolve funding cost issues. According to NICE Credit Rating, the average interest rate on newly issued bonds by card companies in the third quarter of this year was 4.4%, while the average rates on bonds maturing in 2024 and 2025 are 2.9% and 3.3%, respectively. Even if funding costs decrease somewhat due to rate stabilization compared to this year, refinancing costs caused by the interest rate gap remain inevitable.

Seong-Jin Kim, senior researcher at NICE Credit Rating, explained, "With the ongoing economic slowdown, private consumption is also likely to weaken, which could further reduce the profit growth rate of credit card companies," adding, "It is necessary to continuously monitor the burden of funding costs on card company profitability."

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