[Edaily Marketin Reporter KIM YEON-SEO ] Corporate bond yields have surged to their highest level in two years and eight months. Amid rising yields across the bond market driven by the Bank of Korea’s benchmark rate hike and geopolitical tensions stemming from the Middle East, concerns over credit risk are also mounting due to the overlapping crises involving JR Global REIT and the Joongang Group.

However, as absolute yields rise, large-scale capital is flowing into high-quality bonds, and the polarization of investment demand based on credit ratings appears to be becoming even more pronounced.

According to BondWeb on the 27th, the yield on 3-year corporate bonds (AA-) stood at 4.576% per annum that day. The yield on 3-year corporate bonds rose to 4.653% per annum on the 24th, reaching its highest level in approximately 2 years and 8 months since November 14, 2023 (4.704%). After setting new annual highs for three consecutive trading days and continuing a steep upward trend, the yield showed signs of stabilization on this day.

The yield on 3-year “BBB-” corporate bonds stood at 10.373% on this day. It had risen to 10.450% on the 24th, marking its highest level since February 2024. Since bond yields and prices move in opposite directions, the recent rise in yields indicates a decline in corporate bond prices.

The credit spread—which reflects the credit risk of corporate bonds relative to Treasury bond yields—is also widening. The yield spread between 3-year Treasury bonds and 3-year “AA-” corporate bonds widened from 52.4 basis points on January 2, the start of the year, to 69.4 basis points on the 24th of this month. As of this afternoon, it had expanded to 71.2 basis points.

Corporate bond yields are typically determined by adding a premium—which reflects the issuing company’s credit risk and liquidity risk—to the yield on a government bond with the same maturity. A widening credit spread means that investors are demanding a higher risk premium than before in exchange for purchasing corporate bonds. As rising government bond yields and widening spreads occur simultaneously, the cost of corporate bond financing for companies is also rising rapidly.

The Bank of Korea’s benchmark interest rate hike is cited as the direct cause of the recent sharp rise in corporate bond yields. On the 16th, the Bank of Korea raised the benchmark rate by 0.25 percentage points from 2.50% to 2.75% annually, ending a streak of eight consecutive rate freezes. The market generally views this decision as the start of a rate-hiking cycle.

Some in the securities industry suggest that the benchmark rate, currently at 2.75% per annum, could rise to around 3.50% by year-end. In this scenario, forecasts indicate that the yield on 3-year government bonds could also exceed 4% by year-end.

Increased volatility in international oil prices due to the armed conflict between the U.S. and Iran is also weighing on the bond market. This is driven by concerns that rising oil prices could fuel inflation, potentially prolonging the tightening cycles of central banks around the world beyond expectations. Combined with risk-averse sentiment stemming from instability in the Middle East, volatility in the domestic bond market has also increased.

Investor Sentiment Toward Subprime Bonds Cools Amid JR and JoongAng Crises

A series of credit events is also weighing on investor sentiment toward corporate bonds. In April, JR Global REITs filed for rehabilitation proceedings after failing to repay the principal and interest on 40 billion won worth of corporate bonds. At the time, liquidity issues materialized as a cash trap emerged amid a decline in the value of its core asset, the Finance Tower in Belgium.

Last month, following JTBC’s failure to repay its securitized debt, major affiliates of the Joongang Group—including Joongang Holdings, Contentsree Joongang, and Megabox Joongang—successively filed for rehabilitation proceedings. As credit issues arose at the Joongang Group, a major issuer in the BBB-rated corporate bond and retail bond markets, a trend of avoiding non-investment-grade bonds spread, particularly among individual investors and high-yield funds.

Subsequently, on the 14th, Hanjin (BBB+) received a total of 44 billion won in orders during the bookbuilding for a 40 billion won corporate bond issue, but 1 billion won of the one-year tranche remained unsold. Although total orders exceeded the offering amount, the fact that the target amounts for each maturity were not met is seen as evidence of a weakening investment base for BBB-rated bonds. In particular, given that Hanjin is an issuer with a “positive” rating outlook even among “BBB+” corporate bonds, analysts suggest that market caution has spread beyond individual companies to the non-investment-grade sector as a whole.

Increased Interest Attractiveness… Capital Flows into High-Grade Bonds

On the other hand, some view rising interest rates as an investment opportunity. This is because the absolute yield on 3-year “AA-” corporate bonds has risen to the high 4% range, increasing the appeal of carry income earned from holding the bonds. It is assessed that high interest income can partially offset valuation losses resulting from future increases in interest rates or credit spreads.

This investment demand is evident in the book-building results of high-quality issuers. SK Eco Plant (A-) received 987 billion won in orders during its corporate bond book-building on the 22nd, which targeted 100 billion won. This amount is approximately 10 times the target amount. Orders exceeded the target amount across all maturities, and the issuance rate was set below the individual market average rate.

KCC (AA-) also secured a total of 1.385 trillion won in orders during its corporate bond bookbuilding on the 23rd, which targeted 200 billion won. Despite increased interest rate volatility, funds amounting to several times the target amount have poured into issuers rated A or higher.

Market observers predict that the credit polarization—where funds flock to high-quality bonds while BBB-rated and lower non-investment-grade bonds are shunned—is likely to continue for the time being.

Choi Seong-jong, an analyst at NH Investment & Securities, noted, “The credit market has recently seen an influx of carry demand for high-grade bonds that offer stable carry (interest income),” adding, “Amid limited corporate bond issuance, companies participating in bookbuilding are securing funds steadily.”

He added, “While caution regarding the timing and frequency of benchmark interest rate hikes remains, interest rates have become more attractive. Furthermore, since government-led restructuring of unfavorable business conditions is helping to prevent additional credit events, selective carry investments in top-tier ratings and high-quality companies remain a valid strategy.”