[E-Daily Marketin Reporter LEE GEON-EOM ] On the 15th, SK GeoCentric conducted a bookbuilding process for a corporate bond issuance. Although the amount of funds raised exceeded the target, the interest rate was set 0.4 percentage points higher than the average rate for corporate bonds with the same credit rating. On the same day, during Daehan Cable’s bookbuilding process, the interest rate for a two-year bond was also set 0.06 percentage points higher than the average.

While issuance rates were generally set below the market average as recently as early September, they have begun to exceed the average as the month has progressed. Concerns are mounting that interest rate conditions will become increasingly unfavorable as U.S. Treasury yields skyrocket.

Consequently, domestic companies appear to be facing growing concerns, as rising government bond yields could lead to higher financing costs for corporate bonds and other debt instruments.

According to the Bond Information Center of the Korea Financial Investment Association on the 28th, the yield on “AA-” rated 3-year corporate bonds stood at 4.788% as of that afternoon, up 0.099 percentage points (p) from the previous trading day, the 23rd (4.689%). The yield on “BBB-” rated corporate bonds rose 0.102 percentage points to 10.591%. Both figures represent their highest levels this year.

Analysts attribute the sharp rise in yields immediately following the holiday to rising U.S. Treasury yields. They explain that as global Treasury yields surged across the board, the domestic bond market was unable to avoid the impact. Concerns over further interest rate hikes by the Federal Reserve, compounded by geopolitical uncertainty, drove yields higher.

In fact, the yield on the 10-year U.S. Treasury note rose to 5.22% during trading on the 25th (local time), reaching its highest level since June 2007. The yield on the 30-year note also soared to 5.5%, hitting its highest level since 2004. The yield on 3-year government bonds also rose to 4.112% on the 28th, up 0.098 percentage points from the 23rd, the last trading day before the holiday. The yield on 5-year bonds likewise jumped 0.111 percentage points to 4.337%.

Corporate bond yields had already been on an upward trend since the beginning of the year. This reflects market expectations that the semiconductor boom has driven economic growth beyond projections, thereby increasing the scope for interest rate hikes. Yields on “AA-” rated corporate bonds rose by 1.325 percentage points compared to the start of the year (3.462%).

Yields on “BBB-” rated corporate bonds have continued their upward trend since entering double digits at the end of April. The yield on the 3-year government bond has also jumped by 0.325 percentage points over the past month. Since the 11th, it has remained stuck in the 4% range.

Given these circumstances, the financing burden on companies is expected to increase significantly. This is because companies that need to issue new corporate bonds or refinance existing ones while interest rates remain at their annual highs will have no choice but to absorb the higher rates.

The problem is that there is no buffer to absorb the rise in Treasury yields. While the yield on 3-year Treasury bonds rose by 0.325 percentage points over the past month, the yield on ‘AA-’ rated corporate bonds also rose by 0.319 percentage points. This means the credit spread—the difference between Treasury and corporate bond yields—has effectively remained unchanged.

This means that while institutional demand remained strong enough to prevent the spread from widening, it did not narrow enough to offset the rise in Treasury yields. Analysts note that the structure of the market means the increase in Treasury yields is directly passed on to corporate financing costs.

The market expects corporate bond yields to continue a gradual upward trend for the time being. Observers note that sharp volatility is likely to be limited, given the steady inflow of funds into bond funds and robust demand for high-quality bonds. However, it is assessed that the timing of interest rate stabilization depends on whether geopolitical uncertainties are resolved.

A credit analyst at a securities firm stated, “We had expected interest rates would not rise significantly, as we judged the likelihood of a Fed rate hike to be low, but corporate bond yields are still on an upward trend,” adding, “It is correct to interpret this as a result of rising U.S. Treasury yields driven by geopolitical uncertainty.”

He continued, “With substantial inflows into bond funds and robust demand, it is more likely that we will see a gradual upward trend rather than sharp volatility,” adding, “If geopolitical uncertainties subside, the market should find some degree of stability.”