With the Bank of Korea raising the base rate to 3% on the 27th, there are views that funding by corporations will become shorter-term and more polarized. As caution over additional rate hikes has eased, short-term market rates have fallen, while long-term rates, with supply-demand pressures still in place, are likely to stay near their peaks.
According to the financial investment industry on the 31st, the Bank of Korea raised the base rate by 25 bp (1 bp = 0.01 percentage point) to 3.00% at the meeting of the the Bank of Korea's monetary policy committee on the 27th. The base rate moving into the 3% range is the first time in 21 months since Nov. 28, 2024.
The base rate rose, but market rates fell instead. As the Bank of Korea described this hike as a preemptive move, expectations have formed that the magnitude of additional hikes could fall short of prior market forecasts. According to the Korea Financial Investment Association, on the 27th the 3-year Treasury yield closed at 3.755% per year, down 0.061 percentage point from the previous trading day, and the 10-year yield closed at 4.238% per year, down 0.05 percentage point.
By contrast, there are forecasts that long-term rates will likely remain elevated for the time being. Long-term rates tend to move with long-dated Government Bonds yields in major countries such as the United States rather than changes in the base rate. U.S. long-dated Government Bonds yields remain high due to fiscal pressures and ultra-long issuance by big tech corporations.
On top of that, supply-demand factors also add to weakness in the ultra-long end. Demand from insurers, which accounts for most of the demand for ultra-long maturities, has weakened, and the decline in the Ministry of Finance's Government Bonds supply is expected to slow only gradually. According to KB Securities, if this year's actual issuance stays around 225.7 trillion won, an additional 14.51 trillion won of 30-year Government Bonds would need to be issued.
Lim Jae-gyun, a researcher at KB Securities, said, "Although the rise in yields will somewhat calm after the Monetary Policy Board and the 2027 budget proposal are released, the weakness in 30-year maturities will persist as there is no change in fundamentals."
If long-term rates stay high, there are expectations that corporations will accelerate issuance in the short-term market. When long-term rates are elevated, there is a stronger incentive to raise short-maturity funds rather than lock in high interest costs.
Jeong Hwa-young, head of the bond center at the Capital Market Institute, assessed, "During a hiking cycle, issuing long-term bonds prompts the market to demand higher rates, making short-term funding such as CP or electronic short-term bonds more advantageous."
The shift toward shorter maturities in corporate bond issuance has continued this year. According to the Financial Supervisory Service, issuance of commercial paper (CP) and short-term bonds in the first half of this year totaled 1,272.8483 trillion won, up 515.1069 trillion won (68%) from a year earlier. By contrast, funding via stocks and corporate bonds decreased. Public offerings of stocks and corporate bonds in the first half came to 126.5754 trillion won, down 23.3570 trillion won (15.6%) from the same period a year earlier.
Polarization among companies by credit rating also appears likely to deepen. Corporate bond rates are determined by adding each corporation's credit spread to market rates. When investor sentiment in the primary market weakens, lower-rated corporations are asked to pay higher rates. Corporations with strong ratings raise funds at lower rates, while those with weaker ratings are more likely to raise funds at higher rates.
Kim Sang-man, a researcher at Hana Securities, explained, "Corporations with lower credit ratings are increasingly likely to raise funds in the short-term market at higher rates." In fact, Lotte Engineering & Construction secured orders more than three times the offering amount in a 50 billion won corporate bond bookbuilding, but orders for the 1-year tranche were concentrated at the top end of the indicative coupon band.