Corporate Bond Market Slump Continues in August... "Recovery Expected Early Next Year" [Click e Market]

Demand Forecast for August Plummets, Issuance Slump Deepens
CP Rates Remain Lower Despite Additional Rate Hikes
Weak Outlook Even for Peak Season in September and October

The corporate bond market is expected to become even quieter this August. While seasonal factors such as the summer vacation period and the submission of semiannual reports are at play, this year, the slump in bond issuance is likely to be even deeper than usual. This is because companies are opting to issue commercial paper (CP), which carries relatively lower interest rates, rather than issuing more expensive corporate bonds.

On August 4, Samsung Securities reported that demand forecasting for corporate bonds scheduled for August has dropped significantly. Except for the issuance of hybrid capital securities by banking financial holding companies and large life insurance companies, the plans for corporate bond issuance among general companies remain sluggish.

The corporate bond market typically slows down until mid-August. During the vacation season, many companies choose to postpone issuances until after filing their semiannual review reports. However, this year, seasonal factors alone do not fully explain the weakness in the market. The core issue is funding costs.

Despite the increase in the base interest rate in July, short-term rates have not risen sharply. With ample liquidity maintained through short-term funds such as money market funds (MMFs), the rise in negotiable certificate of deposit (CD) and commercial paper (CP) rates has been limited. In contrast, government bond and corporate bond yields remain elevated, already reflecting the possibility of additional rate hikes through the first half of next year.

As a result, the spread between 3-month CP rates and 3-year corporate bond rates has widened to as much as 130 basis points (bp; 1bp = 0.01%). From the corporate perspective, it is much cheaper to raise funds via short-term CP than to issue long-term corporate bonds. Thus, there is less incentive for companies to rush bond issuances.

Some analysts warn that this choice could create risk at the end of the year. Because CP issuance has been high this year, demand for refinancing at year-end may increase. Additionally, in December, short-term funds may flow out and buying demand may weaken, potentially driving CP rates up sharply.

It remains uncertain whether there will be a recovery even during the peak season for corporate bond issuance in September and October. This is because corporate bonds maturing during this period amount to a substantial 13.4 trillion won. If a base rate hike in October pushes short-term rates up by 20 to 30 basis points, the gap with corporate bond yields may narrow. However, the current difference, which has expanded to 130 basis points, is unlikely to shrink dramatically. Ultimately, if corporate bond funding costs remain significant, demand for new bond issuance may remain subdued.

If the interest rate hike cycle continues, it will also be difficult to expect strong investor demand for corporate bonds, raising concerns about broader issuance spreads. Kim Eun-ki, Team Leader of Global Fixed Income at Samsung Securities Research Center, explained, "At the beginning of next year, rather than absolute yield advantages, it is the inflow of funds into bonds at the start of the year and expected reduction in supply that may help the corporate bond market recover to some extent."

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