Korea Investment & Securities: Will the Beginning-of-the-Year Effect for Corporate Bonds Disappear? ... The Key Is Government Bond Yields

Recently, concerns have been raised that the so-called "beginning-of-the-year effect" may weaken as companies are showing a passive attitude toward issuing corporate bonds. The key variable identified is government bond yields. If the yield on the 3-year government bond stabilizes around 2.9%, it is expected that companies will revise their funding plans, leading to an acceleration in bond issuance and the emergence of the beginning-of-the-year effect.

Kim Kimyung, a researcher at Korea Investment & Securities, stated in a report titled "Tendencies to Delay Corporate Bond Issuance and the Beginning-of-the-Year Effect" on December 10, "Currently, it appears that many companies are inclined to postpone bond issuance until around March or April next year due to concerns over rising funding costs caused by a sharp increase in interest rates."

Typically, in January and February each year, there is abundant demand for bonds as institutions such as retirement pension funds allocate capital, leading to an increase in corporate bond issuance. However, this month, companies such as SK Telecom and KCC Glass, which were preparing to issue corporate bonds, have temporarily suspended their plans and postponed their schedules to the first half of next year, indicating a lack of active participation from companies.

In particular, if the yield on the 3-year government bond does not fall below the 3% range, which can be seen as an overshooting level, there is a possibility that the volume of corporate bonds issued at the beginning of the year will be more limited than expected. Kim explained, "Given that a large volume of corporate bonds will mature in January and February, some of this will be refinanced, but at the current government bond yield level, a considerable amount of issuance is likely to be deferred."

However, Kim noted that the yield on the 3-year government bond appears to be showing signs of being capped in the mid-3% range. As a result, certain sectors such as financial bonds are experiencing a moderately strong trend, with credit spreads narrowing gradually. He said, "Although demand for credit bonds is selective, it is already evident to a certain extent. If the volume of corporate bonds issued at the beginning of the year remains limited as short-term funding market tightness eases and supply-demand conditions improve seasonally, a demand-driven environment will emerge, leading to a strong performance for credit."

Accordingly, if government bond yields move away from overshooting levels and stabilize, it is expected that even if corporate bond issuance increases, the market will be able to absorb the supply smoothly and the beginning-of-the-year effect will appear. Many in the market view a yield of around 2.9% for the 3-year government bond as an appropriate level. Kim assessed, "If the yield stabilizes around 2.9%, companies may revise their funding plans, potentially accelerating corporate bond issuance at the beginning of the year."

He added, "Expectations are rising that the Bank of Korea's outright purchase of government bonds will stabilize the market. If government bond yields stabilize, demand for credit carry could strengthen sequentially. Even if issuance increases, the market should be able to absorb it as long as yields move away from overshooting levels and stabilize."

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