"Credit Strength Expected to Continue in February Despite Tariff Disputes"

It is analyzed that the strong trend in the credit bond market will continue in February. However, the strength is expected to be limited compared to January, which showed a stronger flow than anticipated due to the year-beginning effect.

Kim Gi-myeong, a researcher at Korea Investment & Securities, stated in a report released on the 6th, "Even if the foreign exchange market becomes turbulent due to Trump's tariff policy, the pressure on government bond yields to fall as a safe asset due to risk asset avoidance will operate to some extent, and the inverse carry trend of government bonds is expected to continue despite the February base rate cut." He added, "This bond market environment creates conditions where carry demand can flow into credit bonds, which have higher yields compared to government bonds."

Previously, despite the sharp rise in exchange rates due to U.S. President Donald Trump's tariff policy, the pressure on government bond yields to rise was limited due to foreign investors' purchases of government bond futures, and on the first day the tariff news was announced, the 3rd, there was downward pressure on yields. This is considered a factor that increases the attractiveness of credit bonds, which have relatively higher yields.

Researcher Kim said, "The strong trend in credit bonds is expected to continue in February," adding, "However, not only the top-tier public and bank bonds but also corporate bonds and asset-backed securities yields hover around the inverse carry zone at about 3% depending on the issue and maturity segment, so there is price pressure until the rate cut. The strength will be limited compared to January."

He noted, "Although there is a possibility that investment sentiment toward credit bonds, led by corporate bonds, may be somewhat dampened due to concerns over corporate earnings deterioration caused by Trump's tariff policy amid a sluggish economy, it is judged that the direction toward strength will not change." In particular, it is analyzed that high-grade companies have the financial capacity to endure earnings declines.

Kim pointed out that high-grade credit bonds are regarded as quasi-benchmark bonds following government bonds, which are benchmark securities, stating, "As a result, credit spreads and government bond yields tend to move in the same direction with a time lag. In an environment where the government bond direction is toward strength, credit bonds also show strength with a time lag, and the direction of credit spreads is toward narrowing."

From a supply and demand perspective, he expected that corporate bond issuance by companies confirming the year-beginning effect will proceed massively in February, but except for the corporate bond sector, the net issuance scale will not be large. He said, "Basically, with high expectations for a rate cut in February and an environment where Trump's tariff policy can lead to a preference for safe assets, bond demand will remain firm," adding, "Favorable supply and demand is expected to continue."

By detailed sector, public bonds are expected to strengthen as the inverse carry is expected to be resolved due to the February rate cut outlook. However, since the absolute yield attractiveness is declining, the strength is analyzed to be relatively small. In the case of Korea Electric Power Corporation bonds, the amount maturing in February is estimated to be in the 20 trillion won range, and as in the recent trend, some of the maturing bonds will be refinanced, with issuance estimated to be around 10 trillion won. Kim added that since they have relative yield attractiveness compared to other public bonds, there should be no particular problem in absorbing the issuance volume.

Bank bonds are also expected to have relatively small strength, similar to public bonds. He explained, "Although the spread gap between the bank bond sector and the corporate bond and asset-backed securities sectors narrowed in January, it is still wider than the long-term historical average. The reset of the household loan management target limit at the beginning of the year is a factor increasing bank bond issuance demand, but due to the housing market downturn, the issuance demand is not expected to be large. Bank bonds are expected to have a slight net issuance trend."

Asset-backed securities are expected to maintain a strong issuance market trend with steady demand due to scheduled repo fund executions in February, and since the amount maturing is not large, a favorable supply and demand situation and a strong issuance market trend are expected. Corporate bonds are expected to see many companies issuing in February due to the Lunar New Year holidays in late January and the March fiscal year-end earnings disclosures. He said, "Although it is concerning that there was a lot of corporate bond issuance selling in the secondary market around late January, under an environment where the base rate cut and safe asset preference exert downward pressure on government bond yields, basically favorable supply and demand will continue," and predicted, "The strength will be relatively greater compared to public and bank bonds."

Additionally, he noted that although A-grade capital bonds maintain a strong issuance market, caution is needed due to lingering concerns from domestic demand contraction and real estate market slowdown.

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