[Global Rate Shock] Will Card Companies Face Even Higher Funding Costs? Attention on Specialized Credit Finance Bond Rates

Government Bond Yields Reach Decades-Highs Globally
Domestic Interest Rates Remain a Concern
Card Companies Strive to Ease Funding Burden

There are growing concerns that rising global bond yields could increase the funding burden on credit card companies. The interest rate for bonds issued by specialized credit finance companies—the primary source of funding for card firms—is now approaching the mid-4% range. As external interest rates continue to rise, and with the possibility of additional rate hikes in Korea as well as increased government bond supply, the overall funding environment is unlikely to improve anytime soon. Furthermore, as bonds issued at previously low interest rates mature, card companies may face a higher financial cost during the refinancing process.

According to the Bond Information Center of the Korea Financial Investment Association on September 3, the indicator for specialized credit finance company bond rates—Financial Bond II (issued by financial institutions, unsecured, rated AA+, 3-year maturity; average across five rating agencies)—stood at 4.501% as of the previous day. After starting this year’s first trading session at 3.337%, the rate climbed as high as 4.551% in July.

As specialized credit finance company bond rates have consistently remained above 4%, the funding environment for card companies has worsened compared with the start of the year. More recently, volatility in global bond markets has continued to exert upward pressure on borrowing costs. This situation has arisen due to a combination of factors including inflationary concerns, fiscal expansion in major countries, and uncertainty around monetary policy. On September 1, the yield on the U.S. 10-year Treasury reached as high as 4.788% during intra-day trading, while the 30-year yield climbed above 5.2%. In Japan, the yield on 10-year government bonds rose to 3%, the highest in roughly 30 years. Rising international oil prices have heightened inflation concerns and stoked expectations that major central banks will keep policy rates higher for longer than previously anticipated, fueling bond sell-offs.

Looking forward, if geopolitical risks such as potential oil price instability in the Middle East begin to drive up domestic inflation, there will be a greater likelihood of additional benchmark rate increases by the Bank of Korea. Coupled with the pressure of increased government bond supply resulting from fiscal expansion, some analysts predict that it will be difficult for domestic market interest rates to stabilize.

When market rates remain elevated, card companies are directly affected. Unlike banks, credit card companies cannot attract deposits or savings and are therefore heavily reliant on market-based funding methods such as specialized credit finance company bonds. When these bond rates rise, the interest payments required on new bond issuances increase. Moreover, as bonds that were previously issued at lower rates mature, card companies must refinance at today’s higher rates. Revenues from services such as card loans and installment financing are influenced by factors including interest rates, customer demand, and competition, making it difficult to quickly offset the rise in funding costs.

In response, card companies have diversified their funding sources, turning to short-term bonds, commercial papers (CP), and overseas borrowings. The aim is to reduce reliance on long-term specialized credit finance bonds with high interest rates by spreading out maturities and sources of funding according to market conditions, thereby minimizing financial costs.

An industry official commented, “It cannot be categorically stated that domestic specialized credit finance bond rates will automatically follow global rate increases. However, at present, domestic market rates are already high, and with the possibility of further interest rate hikes and pressure from increased government bond supply, it appears unlikely that funding conditions will improve soon.” The official added, “As bonds issued at low rates in the past reach maturity, card companies will face higher funding costs as they must refinance at the current elevated rates.”

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