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 LEE GEON-EOM Reporter] Although the Bank of Korea tightened monetary policy by raising the benchmark interest rate for two consecutive months—the first time in 3 years and 7 months—the mood in the credit market remains calm. Even as the benchmark rate jumped to 3.00% in one go, corporate bond spreads have remained stable without any clear signs of widening. Market analysts attribute this to the fact that the market has already fully priced in the impact of the rate hike, coupled with a sense of relief among investors as uncertainty surrounding monetary policy has subsided.

According to the Bond Information Center of the Korea Financial Investment Association on the 29th, the spread on 3-year “AA-” rated corporate bonds stood at 68.8 basis points (1 bp = 0.01 percentage point) as of the previous day. This figure is identical to that recorded a week earlier on the 21st (68.8 bp) and shows little change compared to the 27th (69.3 bp), the day of the Monetary Policy Committee meeting. The spread on 3-year “BBB-” rated corporate bonds—which are non-investment-grade—also remained largely unchanged from the previous week’s trend, standing at 649.7 basis points as of the 28th. Specifically, both the yield on 3-year government bonds (3.788%) and the yield on 3-year “AA-” rated corporate bonds (4.476%) rose only slightly from the previous day, thereby maintaining the previously narrowed spread.

A credit spread refers to the difference between the yield on government bonds—which are considered safe-haven assets—and the yield on corporate bonds issued by individual companies. Typically, when the benchmark interest rate rises sharply, companies’ interest burdens and default risks increase, causing corporate bond yields to spike faster than government bond yields and widening the spread.

The market views the lack of significant change in the spread as a result of rate hike expectations already being fully priced in. Rather, with the peak interest rate now concretely estimated at around 3.25% following the Monetary Policy Committee meeting, there is a growing assessment that “policy uncertainty”—the biggest headwind weighing on the market—has been resolved. In particular, the fact that the phrase “it is necessary to continue the rate hike trajectory” has disappeared from the Monetary Policy Statement has strongly reinforced the perception that the rate hike cycle is nearing its end.

The prevailing view in the market is that, in the short term, after a brief pause in October, an additional 0.25 percentage point hike will be implemented in November. As a gradual slowdown in the pace of hikes has become a foregone conclusion, investors’ sentiment toward credit purchases has shifted to a wait-and-see stance, and the market is expected to continue a tense tug-of-war around the current level of around 70 basis points for the time being.

Unlike the long-term market, the short-term money market reacted immediately to the benchmark rate hike, showing a distinct pattern. The yield on 91-day commercial paper (CP) remained steady in the 3.15–3.16% range from mid-month, reflecting a strong wait-and-see attitude, but then jumped consecutively: to 3.17% on the 26th (the day before the Monetary Policy Committee meeting), 3.21% on the 27th (the day of the meeting), and 3.22% on the 28th. While the long-term corporate bond market focused on the resolution of uncertainty, the short-term funding market appears to have immediately reflected concerns over tightening liquidity in its pricing.

A credit analyst at a securities firm explained, “Market caution has eased as the peak of the rate-hiking cycle has entered a predictable range,” adding, “For the time being, the market will continue to adopt a wait-and-see stance regarding the timing of the next Monetary Policy Committee meeting and the magnitude of the rate hike, rather than focusing on the direction of spreads.”