[Edaily Marketin, Reporter KIM YEON-SEO ] Credit spreads—an indicator of corporate bond investment sentiment—continue to narrow (signaling a bull market in corporate bonds), despite concerns about some investors pulling out. This trend is driven by reduced supply pressure following a decline in corporate bond issuance in August, coupled with an influx of investment demand seeking to capitalize on higher interest rates. However, forecasts suggest that spreads could widen again in the fourth quarter as seasonal capital outflows coincide with upward pressure on short-term interest rates.

According to BondWeb on the 20th, the credit spread—an indicator of corporate bond market sentiment—narrowed by 3.4 basis points (1 bp = 0.01 percentage point) from 72.3 bp on the 5th to 68.9 bp on that day. The credit spread is the difference in yields between 3-year “AA-” rated corporate bonds and 3-year government bonds; typically, a narrowing spread is interpreted as an improvement in corporate bond investor sentiment.

The recent narrowing of the credit spread is supported by a decrease in corporate bond supply. Analysts note that while corporate bond issuance in August fell significantly due to the overlap between the summer vacation season and the filing period for semi-annual reports, robust investment demand—particularly for high-quality bonds—has persisted. The market expects the relative strength of general corporate bonds compared to bonds issued by specialized credit financial companies to become increasingly pronounced.

Cha Ju-hee, an analyst at Shinhan Investment Securities, explained, “Trading volume in the secondary credit market last week was 35.5 trillion won, down from 44.4 trillion won the previous week.” She added, “Although trading contracted as interest rates rose ahead of the holiday on the 17th, the market showed a bullish trend—with credit spreads narrowing—as carry demand from institutions overall remained strong.” She continued, “Last week was a seasonal slow period, coinciding with corporate earnings announcements and the summer vacation season, so there were no book-building events,” adding, “Book-building is expected to gradually resume starting this week.”

Concerns about a supply-demand gap have also been raised following news that SK Hynix, which had been considered a major investor in the credit market, has suspended its investments. However, the assessment is that while some investment demand has pulled out, other latent demand is filling the gap as the price attractiveness resulting from higher interest rates comes to the fore.

Kim Eun-ki, an analyst at Samsung Securities, commented, “Although concerns about a supply-demand gap in the credit market have arisen following the news of SK Hynix’s suspension of investments, the narrowing of credit spreads that began in mid-July has continued,” and assessed that “the impact of these supply-demand concerns on the market as a whole is limited.”

However, the market does not expect the trend of narrowing credit spreads to continue through the end of the year. This is because seasonal supply-and-demand pressures stemming from year-end capital outflows, the possibility of further benchmark interest rate hikes, and the demand to roll over commercial paper (CP)—which has increased significantly this year—could push up short-term interest rates. Short-term interest rates are those applied in the short-term money market for maturities of less than one year, with representative examples including call rates, certificate of deposit (CD) rates, and CP rates.

As of today, the outstanding balance of commercial paper (CP) this year has totaled 363.31 trillion won. This represents a 17.6% increase from the 308.8991 trillion won recorded during the same period last year. As the outstanding balance has grown, a surge in refinancing demand—as issuers seek to reissue CP maturing at year-end—could exert additional upward pressure on CP rates.

In particular, if CP rates rise faster than CD rates, the investment appeal of short-term CPs—which now offer higher yields—will increase. Since investors can earn relatively high returns even over short periods, the incentive to invest in corporate bonds may weaken. This acts as a factor that diverts demand away from corporate bonds and widens credit spreads.

Researcher Kim noted, “In the short term, price attractiveness may fill the supply-demand gap, allowing the credit bull market to continue,” but added, “As we approach year-end, the pace of spread narrowing will slow, and there is a high probability that spreads will widen again due to upward pressure on short-term rates that is higher than in previous years.”