[Edaily Marketin Reporter KIM YEON-SEO ] With corporate bond yields on the rise, companies are turning to bank loans and commercial paper (CP). As abundant short-term liquidity keeps yields on certificates of deposit (CDs) and CP relatively low, this shift in funding sources is expected to continue even during the peak corporate bond issuance season of September and October.

According to the Bond Information Center of the Korea Financial Investment Association on the 3rd, the yield on a 3-year “AA-” rated corporate bond stood at 4.462% per annum, down 1.6 basis points (1 bp = 0.01 percentage point) from the previous day. The yield on 3-year government bonds also closed at 3.742% per annum, down 1.6 basis points. On the same day, the yield on certificates of deposit (CDs) stood at 2.94% per annum, while the yield on 91-day commercial paper (CP) was 3.15% per annum.

Recently, yields on government bonds and corporate bonds have risen significantly as the market has already priced in the base rate hike and the possibility of further hikes. In contrast, the rise in short-term rates, such as those for CDs and CPs, has been relatively limited. This is because abundant liquidity has flowed into the short-term money market, particularly through money market funds (MMFs), thereby easing upward pressure on interest rates.

The CP-CD spread, which indicates credit risk in the short-term money market, stood at 21 basis points as of today, remaining below 30 basis points. While the credit spread—the difference in yields between government bonds and corporate bonds—has widened in the corporate bond market, the CP market continues to enjoy relatively stable funding conditions, supported by abundant idle funds.

Consequently, companies are favoring bank loans and CP issuance over corporate bonds due to lower funding costs. This is because the interest burden on bank loans has become relatively lower as CD rates remain low, and CP rates are also significantly below corporate bond rates. In other words, it has become more advantageous to raise the necessary funds on a short-term basis through bank loans or CP rather than securing long-term funds in advance.

In contrast, the corporate bond market is expected to continue to struggle due to high interest rates compounded by a seasonal lull. August is traditionally a slow season for issuance, as it coincides with the summer vacation period and the deadline for submitting semi-annual review reports. With few bonds maturing, analysts assess that companies have little incentive to issue new corporate bonds while bearing high interest rates.

Even during the peak issuance season of September and October, the corporate bond market is unlikely to see a marked recovery. This is because, as long as CD and CP rates remain low due to abundant liquidity, companies have little incentive to return to the corporate bond market. Even if the benchmark interest rate is raised further, the current interest rate structure is likely to persist, meaning the shift toward funding via bank loans and CPs will likely continue.

However, the situation could change toward the end of the year. With the possibility of further benchmark rate hikes still on the table, the maturity of CP issued this year is approaching, which could lead to a concentration of refinancing demand. Analysts note that while short-term funding instruments will remain more favorable than corporate bonds in terms of interest rates until the end of the year, short-term rates could rise more sharply at year-end due to supply-and-demand pressures.

Kim Eun-ki, an analyst at Samsung Securities, stated, “We expect the rise in short-term interest rates to be limited through the third quarter due to the inflow of ample short-term funds.” He added, “August is typically a slow season for corporate bond issuance, and the slump in issuance is expected to persist due to high interest rates. As corporate bond yields remain higher than short-term interest rates, the slump in issuance is likely to continue through September and October.”