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 ] As the upward trend in commercial paper (CP) yields has paused, the yield spread between corporate bonds and CP has narrowed to its narrowest level in seven months. Although CP rates have risen for 21 consecutive trading days, hitting new yearly highs, the daily increase has slowed to around 1 bp (1 bp = 0.01 percentage point). In contrast, corporate bond yields have fallen to the 4.4% range for the first time since late August. From a corporate perspective, this means the interest rate advantage they enjoyed when raising funds through CPs instead of corporate bonds has shrunk to about half of what it was in July.

Market analysts are increasingly weighing the view that the shift of funds toward medium- and long-term bonds—driven by the perception that yields have peaked—has led to the rise in short-term interest rates. However, given that the possibility of interest rate hikes still remains, some observers predict that rather than a full-scale shift in funds, the market will enter a period of consolidation for the time being.

According to the Bond Information Center of the Korea Financial Investment Association on the 23rd, the yield spread between unsecured 3-year “AA-” rated corporate bonds and 91-day commercial paper (CP), based on the day’s closing prices, stood at 76.2 basis points—the narrowest since March 18 (74.5 basis points). This represents a decrease of 9.9 basis points from the level on the 16th (86.1 basis points) and has fallen to about half the level recorded on July 24 (150.3 basis points), which was the widest spread of the year.

This narrowing of the spread was driven by corporate bond yields steadily declining while CP yields rose. On that day, the yield on “AA-” rated corporate bonds stood at 4.492%, down 4.9 basis points from the 16th and the lowest level since August 28. The yield on 91-day CPs stood at 3.73%, up 47 basis points from the 18th of last month (3.26%); however, since it rose by only 1 basis point each day this week, the weekly increase was limited to 5 basis points—one-third of the previous week’s gain (15 basis points).

Supply and demand in the short-term money market are cited as the reason behind the trend in CP rates. Unlike medium- and long-term rates, which are linked to government bond futures, CP rates are driven by issuance volume and buying power; the explanation is that while recent issuance has increased significantly, buying demand has not kept pace.

According to BondWeb, CP issuance from the 1st to the 23rd of this month totaled 49.163 trillion won, a 70.2% increase from the same period last year (28.8871 trillion won), already surpassing the total issuance for the entire month of August (46.2474 trillion won). Third-quarter issuance also rose 19.1% year-over-year to 158.0831 trillion won. This is attributed to companies flocking to CPs, which offered significantly lower interest rates than corporate bonds.

However, buying interest in these securities actually weakened. This was because more investors were selling short-term instruments and shifting to medium- and long-term ones. Analysts note that as U.S. Treasury yields hit a 20-year high, the perception spread that it was time to invest in long-term securities; combined with a preference for safe-haven assets and signs of a stock market correction, buying interest shifted toward medium- and long-term instruments.

The structure of the CP market, where the pool of buyers is limited, is also cited as a factor amplifying this effect. The CP market is primarily absorbed by money market funds (MMFs), bank-managed specific money trusts (MMTs), securities firms’ wrap accounts (MMWs), and proprietary investment (PI) desks.

Given that asset managers prioritize highly liquid assets such as repurchase agreements (RP) and government bonds, demand for CPs does not increase even if MMF balances rise. The weakening of buying momentum for CPs was also influenced by a trend of selling short-term instruments and shifting to medium- and long-term ones. Analysts note that as U.S. Treasury yields hit their highest levels in over 20 years, the perception spread that it was time to invest in long-term securities; combined with a preference for safe-haven assets and signs of a stock market correction, buying momentum shifted toward medium- and long-term securities.

However, many believe it is unlikely that funds will shift en masse to medium- and long-term securities, as interest rates could rise again due to a protracted war or an economic recovery. The slower pace of CP yield increases this week is interpreted as a result of this moderation.

A corporate bond market official stated, “There is a trend of selling short-term bonds and switching to medium- and long-term bonds based on the perception that interest rates have peaked, and combined with a preference for safe assets, medium- and long-term rates are falling.” He added, “When the stock market was surging, funds were pouring exclusively into stocks—to the point where people said, ‘You buy bonds only when stocks fall’—but recently, as stocks have corrected, funds are flowing back into bonds.”

He continued, “However, the rate hikes aren’t over yet; if the war drags on or the economy improves further, rates could rise again, so capital isn’t shifting indefinitely.” He added, “We view this as a brief pause, and we expect a generally flat-to-slightly weaker trend across both short- and medium-to-long-term bonds through the end of the year.”

Meanwhile, corporate bond spreads (the difference in yields between government bonds and corporate bonds) continued to show stability. On the 23rd, the spread between 3-year government bonds (3.803%) and “AA-” rated corporate bonds stood at 68.9 basis points, moving within a narrow range of 68.3 to 69.4 basis points this week and remaining within the 65.9 to 72.3 basis point trading range that has persisted since July.