"H4L Lasts Long"... Concerns Over Corporate Financing Burden Amid Rebounding Bond Yields

Record-High Corporate Bond Maturities Concentrated in First Half
Bond Market Weakens as Interest Rate Cut Expectations Decline
Successful Demand Forecasts Mainly for High-Quality Bonds

Bond yields are rebounding as differentiation forms around the timing of the U.S. Federal Reserve's (Fed) interest rate cuts. With this year seeing the largest-ever maturity of corporate bonds and the fallout from real estate project financing (PF) defaults, corporate financing conditions are likely to become more challenging.

According to the Seoul bond market on the 24th, the final yield on the 3-year government bond on the 23rd rose by 0.8 basis points (1bp = 0.01 percentage points) from the previous session to 3.286%. The 3-year government bond yield, which was in the 3.1% range at the end of last year, has been hovering around 3.3% since last week.

This is because, amid growing uncertainty about the duration of high interest rates, strong U.S. economic indicators and Fed officials' comments on pacing have led to a rebound in U.S. Treasury yields, causing domestic bond yields to show a weak correlation with the U.S.

According to the Chicago Mercantile Exchange (CME) FedWatch, the probability of a rate cut in March, which was over 80% earlier this month, has now dropped to 49%. The sentiment that high interest rates will persist for a longer period (higher for longer, H4L) is becoming stronger. As a result, the U.S. 10-year Treasury yield has remained above 4% for over a week. This contrasts with last fall when the 10-year yield briefly surpassed 5% intraday for the first time in 17 years, and the end of last year when it traded in the 3% range amid expectations of tightening ending.

Kim Myung-sil, a researcher at Hi Investment & Securities, said, "Assuming a scenario where U.S. economic growth this year slightly underperforms the potential growth rate (1.5%), disinflation continues, and there is a mild slowdown in employment, the possibility of a rate cut in June to July is weighted more than in March." However, she added, "Unlike previous rate cut cycles, the pace of cuts is likely to be slow, and the final policy rate level is expected to remain high unless a financial crisis occurs, which could act as a factor restraining the decline in long-term interest rates."

Currently, such volatility raises concerns that it could burden corporate financing given the domestic corporate bond market situation.

According to the Bank of Korea, the maturity of corporate bonds, which were issued in large volumes against the backdrop of low interest rates from 2019 to 2021, is concentrated this year, with a record-high maturity amount of 46.5 trillion won approaching. In particular, 28.6 trillion won of this is concentrated in the first half of the year, with maturities in the first quarter (14.3 trillion won) expected to increase compared to the same period last year (10.1 trillion won).

Im Jae-kyun, an analyst at KB Securities, said, "As the bond market showed weakness until the end of last October, many issuers delayed their issuance to early this year," adding, "With issuance expected to be concentrated before the Lunar New Year holiday, there is concern that supply-demand pressure will increase."

Moreover, since the bond market still reflects a significant portion of the possibility of a rate cut in March, there is room for further retreat in rate cut expectations, suggesting that the weakness will continue. Analyst Im explained, "For a rate cut to be possible in March, a change in the statement wording at the January Federal Open Market Committee (FOMC) meeting is necessary, but since the December FOMC, Fed officials have argued that market expectations for rate cuts are excessive."

Uncertainty related to real estate PF is also appearing as a bearish factor. Kim Sang-man, an analyst at Hana Securities, explained, "In the case of corporate bonds, the issuance market is holding up due to demand forecasts from the early-year effect, but the strength is weaker compared to previous years," adding, "This is judged to be the result of uncertainty related to real estate PF affecting investor sentiment."

In fact, companies such as Hyundai Engineering & Construction and Samsung Securities have succeeded in corporate bond demand forecasts this month, but the atmosphere is mainly focused on high-grade bonds rated AA or higher. Analyst Kim said, "Although the absolute total volume of real estate PF is not at a level that burdens the entire economy and there is confidence that policy responses will act as a buffer in emergencies, this is only at an overall level, and individual cases may have their own ups and downs, which is the consensus."

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