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>

[Edaily Marketin Reporter LEE GEON-EOM ] While U.S. Treasury yields have soared to their highest levels in over 20 years, domestic corporate bond yields are actually showing a stable trend. Yields on government bonds, which have reacted sensitively to external headwinds throughout the year, have already fully priced in upward pressures, compounded by the government’s commitment to managing supply and demand. As a result, analysts say that corporate bond yields—which typically track government bond yields—have halted their upward trend. However, caution remains as interest rates in the short-term money market, such as commercial paper (CP), are rising belatedly, and liquidity could tighten ahead of the fourth-quarter book closing.

According to the Bond Information Center of the Korea Financial Investment Association on the 8th, as of that morning, the yield on 3-year unsecured “AA-” rated corporate bonds stood at 4.642%, down 0.2 basis points (1 bp = 0.01 percentage point) from the previous trading day (4.644%). This is 14.6 basis points lower than the year-to-date high recorded on the 28th of last month (4.788%). The yield on “BBB-” rated bonds also fell by 0.3 basis points to 10.446% compared to the previous trading day (10.449%). Compared to the 28th of last month (10.591%), this represents a decline of 14.5 basis points.

Corporate bond spreads are also continuing to trend steadily without significant fluctuations. A corporate bond spread refers to the difference between the yield on government bonds—which are considered safe assets—and the yield on corporate bonds. As of the morning of the 8th, the spread between the 3-year government bond (3.964%) and “AA-” rated corporate bonds stood at 67.8 basis points, a level similar to that on the 28th of last month (66.9 basis points). During this period, the spread fluctuated within a range of 66.9 to 70.3 basis points.

This suggests that the decline in corporate bond yields stems more from the stabilization of Treasury bond yields—which serve as a benchmark—than from a reduction in credit risk. In fact, the yield on the 3-year Treasury bond, which hit a year-to-date high of 4.119% on the 28th of last month, fell by 15.5 basis points to 3.964% on the morning of the 8th. This decline is nearly identical to the drop in yields on “AA-” rated corporate bonds (14.6 basis points).

The market is increasingly weighing the interpretation that the rise in Treasury yields has already been sufficiently priced in. Analysts note that since yields have spiked sharply whenever negative news emerged throughout the year, the market’s sensitivity to the recent rise in U.S. Treasury yields was not particularly high.

In contrast to the relatively stable performance of government bond and corporate bond yields, the yield on the 10-year U.S. Treasury note surpassed 5.36% during trading on the 7th (local time), hitting its highest level since 2002. The yield on the 30-year note also rose to the 5.73% range, reaching its highest level in 24 years. Even on the morning of the 8th, when the sharp rise in U.S. Treasury yields was reflected in the market, domestic corporate bond yields actually fell slightly.

Some analysts suggest that the sharp rise in yields immediately following the Chuseok holiday has largely alleviated upward pressure. The yield on 3-year government bonds surged by 11.3 basis points in a single day on the 28th of last month, right after the holiday. This was the result of the market reflecting all at once the rise in U.S. Treasury yields that had accumulated during the holiday period. The market also views the government’s signal of its intention to reduce bond issuance and manage the supply and demand of financial bonds and credit bonds as having contributed to market stability.

A bond portfolio manager at an asset management firm said, “Given that the market has reacted sensitively to negative factors throughout the year, we should view this as a case where that sensitivity was not particularly high,” adding, “Since market expectations were so low to begin with, much of the impact had already been priced in.”

He continued, “Until now, it has been difficult to decouple overseas and domestic interest rates, but the government has announced it will reduce issuance and manage the issuance of financial bonds and credit union bonds,” adding, “The structure is such that when government bond yields stabilize and bank bonds stabilize, corporate bonds will also stabilize.”

The problem lies in the short-term money market. Unlike corporate bond yields, which have stabilized, commercial paper (CP) yields are belatedly accelerating their upward trend. As of the morning of the 8th, the yield on 91-day CP stood at 3.52%, up 5 basis points from the previous trading day, setting a new annual high. Compared to the level on the 17th of last month (3.26%), it has jumped 26 basis points in just three weeks.

This explains why analysts are noting that the short-term market—which had performed relatively well throughout the year while the bond market remained weak—is now beginning to feel the pressure. Market participants view the scale of capital outflows from money market funds (MMFs) as a key variable that will determine the direction of the short-term market.

Institutional investors’ year-end book-closing in the fourth quarter is also cited as a factor that could increase volatility. This is because market liquidity could rapidly decline as institutions holding large amounts of corporate bonds begin closing their books as early as the start of the fourth quarter. While the market expects corporate bond yields to continue their current trend for the time being, supported by stable Treasury yields, there are also cautious observations that uncertainty in the short-term market and liquidity gaps could heighten volatility.

An analyst at a securities firm stated, “Throughout this year, the bond market has been weak while the short-term market has been strong, but we are now at a transitional point where that trend is shifting,” adding, “Although the short-term market has been relatively strong, CP rates are rising in a lagging manner, so we need to monitor how much money will flow out of money market funds (MMFs).”

He continued, “For firms that hold large amounts of corporate bonds, some are already entering the book-closing period, so market liquidity is tight,” adding, “Volatility could increase.”