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 ] “There was no capital deployment at the beginning of the year, but now there are far too many deals awaiting due diligence. We have as many as ten RFPs piled up.”

A bond portfolio manager at an asset management firm made this remark regarding the flow of institutional funds pouring into the corporate bond market even during the fourth-quarter book-closing period. He explained that spreads have remained within a narrow range this year as due diligence requests and pending requests for proposals (RFPs) have piled up ahead of the execution of entrusted funds by major institutions, such as pension funds. Typically, around this time of year, demand decreases and spreads widen as institutions close their books.

This is why expectations are growing for a “money move”—a shift of funds into corporate bonds—as the perception that interest rates have peaked combines with concerns over the stock market reaching its peak. However, some caution that it is too early to conclude that a trend reversal is underway, given the ongoing volatility in U.S. interest rates and geopolitical uncertainty stemming from the Middle East.

According to the Bond Information Center of the Korea Financial Investment Association on the 16th, the yield on 3-year unsecured “AA-” rated corporate bonds stood at 4.541% as of that afternoon, down 1.8 basis points (1 bp = 0.01 percentage point) from the previous trading day (4.559%). This is 24.7 basis points lower than the year-to-date high of 4.788% recorded on the 28th of last month and 11.0 basis points lower than the rate on the 8th (4.651%), marking the lowest level since late August.

This was largely due to the continued downward stabilization of benchmark government bond yields. The yield on the 3-year government bond, which hit a year-to-date high of 4.119% on the 28th of last month, fell by 26.5 basis points to 3.854% on the 16th. Analysts explain that corporate bond yields fell in tandem as Treasury yields—which had been capped even when the U.S. 10-year Treasury yield surged to a 20-year high last week—consolidated their downward trend.

Corporate bond spreads are also showing an unusually stable trend, considering that it is the book-closing season. 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. On this day, the spread between 3-year government bonds and “AA-” rated corporate bonds stood at 68.7 basis points, remaining within the range of 65.9 to 72.3 basis points since July.

As recently as the third quarter, the market had expressed concerns that liquidity would rapidly shrink and volatility could increase once institutions with large corporate bond holdings entered the year-end closing period. These concerns have been alleviated by funds managed on behalf of major institutions, such as pension funds. It is assessed that these institutions, which had been cautious about deploying funds at the beginning of the year, have recently begun to actively invest, thereby filling the liquidity gap caused by year-end closing.

A bond portfolio manager at an asset management firm said, “Normally, spreads widen around this time of year due to portfolio rebalancing, but this year is quite unusual,” adding, “It seems everyone believes interest rates have peaked.”

He added, “Combined with the perception that stocks have peaked, it appears that funds from major institutions, such as pension funds, are flowing into the market.”

Interest rates in the short-term money market continue to rise. As of the 15th, the yield on 91-day commercial paper (CP) stood at 3.66%, marking its 15th consecutive trading day of increases and setting a new annual high. Compared to the rate on the 17th of last month (3.26%), it has jumped by 40 basis points in a month and is 13 basis points higher than last week’s rate (3.53% on the 8th). However, the market is increasingly interpreting the rise in CP rates not as a sign of a liquidity crunch in the short-term money market, but rather as a process in which rates—which had been unusually low—are returning to normal levels.

On the same day, the yield spread between “AA-” rated corporate bonds and CPs narrowed to 89.9 basis points—a decrease of 51.9 basis points from the 28th of last month (141.8 basis points)—marking the narrowest spread in about six months since early April. With the interest rate advantage of short-term funding diminishing, observers suggest that companies that have been raising funds through CPs may now have a greater incentive to consider issuing corporate bonds.

A portfolio manager at another asset management firm said, “Since the short-term funding situation isn’t actually bad, I think we should view this as the spreads simply not having risen as much as they could have.”

The market is increasingly weighing the possibility that corporate bond spreads will remain stable for the time being, as long as institutional fund deployment continues. However, some observers note that since the “BBB-” grade yield stood at 10.358% as of the 15th—still in the 10% range—it remains to be seen whether the inflow of funds will extend to non-investment-grade ratings.

A credit analyst at a securities firm said, “Corporate bond yields had already factored in much of the expected movement, and CP yields were unusually low,” adding, “As capital flows into the corporate bond market, it’s difficult to call this a full normalization, but it should be viewed as a process of returning to baseline levels.”

He added, “However, given the volatility of U.S. interest rates and geopolitical uncertainties stemming from the Middle East, it is difficult to draw definitive conclusions at this point.”