[Edaily Marketin KIM YEON-SEO Reporter] Ahead of the Bank of Korea’s Monetary Policy Committee meeting on the 16th, concerns over a potential benchmark interest rate hike are growing, increasing the burden on companies to raise funds. With corporate bond yields and credit spreads both surging to their highest levels of the year, investor sentiment is clearly waning, as evidenced by some unsold issues in the BBB-rated corporate bond market.

According to BondWeb on the 15th, the yield on 3-year AA-rated corporate bonds rose to 4.582% per annum on the 14th, up 7.6 basis points (bp; 1 bp = 0.01 percentage point) from the previous trading day. This marks a year-to-date high, representing an increase of 112.3 bp compared to the 3.459% recorded on the first trading day of the year.

As of that day, the yield on 3-year government bonds stood at 3.865% per annum, while the yield on 3-year AA-rated corporate bonds was 4.561% per annum. The credit spread—the difference between the two yields—stood at 69.6 basis points, widening by 17.2 basis points from 52.4 basis points at the start of the year. Recently, it rose to the 70-bp level during trading, surpassing the previous high of 69 bp reached at the end of 2024.

The credit spread refers to the additional yield required when investing in corporate bonds relative to government bonds. A widening spread indicates that investors are assessing corporate credit risk as higher. Consequently, companies must offer higher yields when issuing corporate bonds, and if market conditions are unfavorable, the likelihood of failing to secure the desired amount of funding increases.

The recent simultaneous rise in corporate bond yields and credit spreads stems from concerns over a potential benchmark interest rate hike ahead of the Monetary Policy Committee (MPC) meeting in July. In a survey of 100 bond market experts conducted by the Korea Financial Investment Association, 66% of respondents predicted that the benchmark interest rate would be raised at the MPC meeting on the 16th.

If the benchmark interest rate rises further, it is highly likely that not only government bond yields but also corporate bond issuance rates will rise as well. This means that the interest expense burden on companies, which are already having to raise funds at high interest rates, could increase even further.

Unsold BBB-Rated Corporate Bonds… Weakening Investor Sentiment Becomes a Reality Investor sentiment

in

the corporate bond market

has already begun

to weaken

. Hanjin (BBB+), during its bookbuilding for a 40 billion won corporate bond issuance the previous day, received a total of 44 billion won in orders, but 1 billion won worth of the one-year bonds remained unsold.

Despite having a “positive” credit rating outlook and offering a wide target yield range, Hanjin was unable to fully raise the targeted amount. This is attributed to heightened investor caution, particularly toward BBB-rated issuers, following a series of credit events in the first half of the year involving companies such as JR Global REIT and Joongang Group.

As conditions in the corporate bond market have deteriorated, companies are diversifying their funding sources. Instead of public corporate bond offerings, they are issuing commercial paper (CP) or electronic short-term bonds, or increasing loans from financial institutions. Some large conglomerates are considering issuing foreign currency bonds as an alternative to the domestic corporate bond market.

However, since funds in the short-term money market are also concentrated on high-quality companies, financing options for non-investment-grade companies remain limited. There are also concerns that if companies finding it difficult to issue corporate bonds increase their short-term borrowing, their maturity profiles will shorten, potentially increasing the burden of refinancing.

The market anticipates that if rising interest rates and widening credit spreads occur simultaneously, the funding environment for companies will deteriorate further in the second half of the year. Analysts note that while high-quality companies may not face difficulties in securing funds per se, their interest expenses could rise, while companies rated BBB or lower may continue to worry about whether they can successfully issue bonds.

A bond market official stated, “With concerns over a benchmark interest rate hike coinciding with a contraction in credit investor sentiment, it is difficult for companies to determine the right timing for corporate bond issuances,” adding, “Even high-quality companies must bear higher costs than before, while for non-investment-grade companies, securing investors is becoming difficult in and of itself.”

Could Buying Interest in Short-Term Credit Securities Signal a Recovery

?
However, some analysts predict that market sentiment could gradually stabilize if buying interest flows into short-term credit bonds, where absolute interest rates have risen. This is because short-term bonds offer relatively low interest rate risk while promising high interest income, which could attract stable carry (interest income) demand.

Kim Eun-ki, an analyst at Samsung Securities, analyzed, “We believe buying interest in short-term credit bonds will be the catalyst for narrowing credit spreads,” adding, “Considering the elevated interest rate levels and short maturities, stable carry demand could flow into the market through short-term credit bonds.”

He continued, “The short-term money market is stabilizing as short-term funds have been rapidly flowing back in since the end of the half-year,” and predicted, “Unless the Monetary Policy Committee meeting in July sends a hawkish message—such as signaling a consecutive rate hike in August—buying interest in short-term credit bonds could serve as a signal of a broader recovery in the credit market.”