Recently, Treasury bond yields hit a record high for the year, and a cold wind is blowing through the bond issuance market. Some corporations are delaying corporate bond issuance or issuing at high yields. While there are forecasts that the issuance burden will continue next year, there are also projections that inclusion in the World Government Bond Index (WGBI) will ease supply-demand pressures.
According to the financial investment industry on the 7th, the credit spread—the yield gap between Treasurys and corporate bonds (unsecured, three-year, AA- rating)—widened 4.3 basis points over about a month, from 40.6 basis points at the end of October this year to 44.9 basis points as of the 4th (1 basis point = 0.01 percentage point).
As the three-year Treasury yield rose 30.9 basis points, the yield on unsecured three-year AA- corporate bonds neared 3.50%. That is because as Treasury yields climbed recently, the market began demanding higher yields on corporate bonds.
In particular, as the Bank of Korea signaled a "hawkish (preference for monetary tightening)" stance, market expectations for a base rate cut diminished.
Rhee Chang-yong, the Bank of Korea (BOK) governor, said in an interview with Bloomberg on Nov. 12 that while the BOK's official stance is to maintain the monetary easing cycle, "the scale and timing of rate cuts, and even whether we pivot, will depend on the new data we see."
He also noted regarding next year's growth outlook that "there is a possibility of an upward revision." This was interpreted as a hawkish signal.
At the Bank of Korea's monetary policy committee meeting held on Nov. 27, the central bank kept the base rate at 2.50% per year and adjusted the monetary policy statement by changing "easing stance" to "possibility of a cut," and the timing of an additional cut to "whether" to cut. The market took this as hawkish, and Treasury yields surged.
As Treasury yields rose, corporate bond yields also climbed sharply in tandem.
Kim Sang-man, a researcher at Hana Securities, said, "The credit market, which maintained a strong tone all year, has run into a stumbling block at year-end and is struggling," identifying the reason for the credit market's unexpected turn weaker as "heightened bond market volatility due to the surge in market interest rates."
As a result, fourth-quarter corporate bond issuance fell sharply. As of the 4th, fourth-quarter issuance totaled 23.949 trillion won, down 21.30% from the same period a year earlier.
The decline in issuance is interpreted as corporations refraining from issuing corporate bonds in the fourth quarter due to the burden from rising interest rates.
Some corporations have gone so far as to postpone their issuance schedules altogether or raise funds at yields higher than the average rates from private bond pricing agencies (market average yields).
For example, SK Telecom, rated AAA, internally reviewed a corporate bond issuance but put it on hold temporarily, and KCC Glass, rated AA, had planned to issue 100 billion won in three-year notes around mid-month but postponed it to the first half of next year.
SK On (A+) is said to have met its 100 billion won corporate bond issuance target in a book-building last month at levels higher than market average yields.
Although KT (AAA) succeeded last month in raising funds at rates below market averages across all maturities—3, 5, 10, and 20 years—this is seen as unusual given the deterioration in investor sentiment in the bond market during the fourth quarter.
With a cold snap hitting the public offering bond market, some corporations are turning their attention to privately placed instruments such as hybrid capital securities or to the short-term funding market.
Hybrid capital securities are bonds issued with a perpetual or extendable 30-year maturity and features such as a five-year call option. Lotte Engineering & Construction recently announced it would issue 700 billion won in hybrid capital securities to improve its financial structure.
On the 2nd, CJ CGV issued 25 billion won in six-month commercial paper (CP), and more corporations are knocking on the short-term funding market.
However, the securities industry expects that inclusion in the World Government Bond Index (WGBI) will help ease supply-demand instability.
The market expects that if Korea's Treasurys are included in the WGBI, foreign investors will buy about 80 trillion won of government bonds between April and November next year.
Kim Eun-gi, a researcher at Samsung Securities, said, "With expectations for a base rate cut disappearing in November, not only government bond yields but also short-term rates such as CDs (certificates of deposit) and CP rose quickly," but added, "Year-end bond outflows and book closing mirror the new-year bond inflows and book building (book-building)."
He also expected increased demand for corporate bond investment through an expansion of securities firms' issuance of short-term notes.
Kim said, "The market for securities firms' short-term notes is about 45 trillion won and has grown rapidly by 15% a year, and with additional firms selected, the financial market expects the market to grow to about 100 trillion won," forecasting that the biggest beneficiaries will be corporate bonds rated A or below.