Fluctuations in credit spreads serve as an indicator of investor sentiment and capital flows in the corporate bond market. “Credit Signal” provides an intuitive analysis of the market’s overall trends and context, focusing on weekly changes in credit spreads. <Editor’s Note>

[E-Daily Marketin Reporter LEE GEON-EOM ] Treasury bond yields, which had been trending downward earlier this month, have recently surged sharply, causing credit spreads to widen as well. Investor sentiment in the corporate bond market remains subdued. Although U.S. President Donald Trump has been pressing for interest rate cuts day after day, the market shows little sign of responding.

Unwavering Premium Rates… Wallets Closed Due to Credit Risk

According to the Bond Information Center of the Korea Financial Investment Association on the 21st, the yield on 3-year “AA-” corporate bonds—considered high-quality—stood at 4.504% as of the 20th, up 11.2 basis points (1 bp = 0.01 percentage point) from the low of 4.392% recorded on the 5th of this month. The benchmark 3-year Treasury bond yield also rose by 14.2 basis points during the same period, from 3.669% to 3.811%, indicating a gradual upward trend in absolute yield levels.

The credit spread—the difference between the yield on government bonds (a safe-haven asset) and the yield on corporate bonds—represents a premium applied because corporate credit risk is higher than that of the government. The fact that the spread is not narrowing, regardless of the direction of absolute yields, indicates that investors still view corporate risk as high and are keeping their wallets closed.

In fact, yields on government bonds (3.959%) and AA- rated corporate bonds (4.653%) both hit their annual highs on the 24th of last month before beginning a sharp decline, reaching lows of 3.669% and 4.392%, respectively, on the 5th of this month. During this period, the AA- spread actually widened from 69.2 basis points on the 23rd of last month to 72.3 basis points on the 5th of this month, when Treasury yields began to plummet. Since then, despite a simultaneous rebound in both government bond and AA- yields, the spread has failed to show a clear narrowing trend and has continued to fluctuate between 69.3 bp and 70.7 bp this month.

For BBB- rated 3-year bonds, which are non-investment-grade, the disparity is even more pronounced. During the same period, while the absolute yield fluctuated between the annual high (10.450%) and this month’s low (10.188%), the spread relative to government bonds has remained virtually stagnant, trapped within a narrow range between 649 basis points and 652 basis points. As of the 20th, it stands at 650.8 basis points. This is interpreted as evidence that investor sentiment toward non-investment-grade bonds has already frozen solid, regardless of the direction of absolute yields.

Macroeconomic Environment Compounded by High Oil Prices… Will the Central Bank’s ‘My Way’ Approach Work?

A corporate bond market official stated, “There is already a strong sentiment in the market that is pricing in the possibility of a rate hike,” adding, “The signals the Fed sends regarding the direction of interest rates at next week’s Jackson Hole meeting will be a crucial turning point.” He added, “Unless the Fed sends a message that is hawkish enough to suggest a rate hike, market caution is unlikely to subside easily.”

Behind this outlook lies the Fed’s hawkish stance. Although President Trump stated on the 19th, immediately after the release of the July FOMC minutes, that he “really wants interest rates to be cut,” the minutes actually revealed that three committee members had voted against the decision, calling for a rate hike instead. Even since Chairman Kevin Warsh took office, there has been no mention of a rate cut, highlighting a clear disconnect between political pressure and the central bank’s judgment.

On top of this, soaring international oil prices are further fueling uncertainty. Rising oil prices are fueling inflationary pressures, which in turn are reinforcing the tightening stance of central banks worldwide. On the 20th, Brent and WTI futures closed at $93.78 and $87.83 per barrel, respectively, surging by over 2% and hitting their highest levels since the 24th of last month.

A bond market official stated, “For spreads to narrow, yields on government bonds—to which the credit market reacts sensitively, such as the AA- rated 3-year bond—must fall, but that won’t be easy right now,” adding, “Since a rate hike in October is more likely than in August, market expectations are unlikely to ease until then.” The source continued, “The recent rise in oil prices is also a burden,” adding, “Since whether oil prices stabilize at lower levels is not solely a matter for the Monetary Policy Committee, stability in the overall macroeconomic environment will ultimately be the key factor.”

In South Korea as well, expectations are growing that the Bank of Korea’s Monetary Policy Committee will raise the benchmark interest rate from 2.75% to 3.00% at its meeting on the 27th. While forecasts regarding the timing of the hike are split between this month and October, few believe the rate-hiking cycle itself has come to an end.