Fluctuations in credit spreads serve as an indicator of investor sentiment and capital flows in the corporate bond market. “Credit Signal” provides an intuitive overview 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 ] Commercial paper (CP) yields have surpassed the yield on 3-year government bonds for the first time in eight months. Unlike corporate bonds, which have followed the downward trend of government bonds, CP yields have risen for 26 consecutive trading days, causing short-term and medium-to-long-term markets to diverge in opposite directions. However, the market is leaning toward the interpretation that this is a “catch-up” phenomenon—a belated reflection of expectations for further benchmark interest rate hikes—rather than a signal of a credit crunch in the short-term money market.

Observers also believe it is unlikely that the burden will shift to corporate bond spreads. This is because, as the market enters the year-end off-season, demand for shifting funding from CPs to corporate bonds is limited, and the demand base for corporate bonds is improving as funds flow into bond funds. However, some caution that volatility could increase depending on the outcome of the November Monetary Policy Committee meeting.

According to the Bond Information Center of the Korea Financial Investment Association on the 31st, the yield on 91-day CPs stood at 3.80% the previous day, 8.5 basis points (1 bp = 0.01 percentage point) higher than the 3-year government bond yield (3.715%). Following the previous day’s rise—when the CP yield exceeded the 3-year government bond yield for the first time in eight months since February 27—the gap widened further on this day.

The trend has reversed completely over the past month. Since the 28th of last month, when yields hit their annual highs, the yield on the 3-year government bond has fallen by 40.4 basis points and the yield on 3-year “AA-” rated unsecured corporate bonds has dropped by 38.1 basis points, while the CP yield has risen by 43 basis points. On this day, the yield on “AA-” rated corporate bonds stood at 4.407%, the lowest level since early August.

Expectations of further benchmark interest rate hikes are cited as the reason behind the rise in CP yields. Until now, despite benchmark rate hikes, CP yields had remained at levels similar to those of certificates of deposit (CDs) as funds flocked to short-term instruments. With forecasts suggesting that the benchmark rate—currently at 3.00% per annum—could be raised again in November, the 3-month CP, which matures next year, is now reflecting the rate hike that had not been factored in previously.

A bond portfolio manager at an asset management firm stated, “While rising short-term rates typically affect medium- and long-term corporate bonds as well, the key factor is the reason behind the rise,” adding, “We are not seeing a situation with excessive issuance, shrinking demand, or a liquidity crunch.” He continued, “Short-term rates, which had been suppressed, are now normalizing ahead of further hikes.”

In fact, liquidity in the short-term money market remains relatively strong. According to the Korea Financial Investment Association, the total assets under management for money market funds (MMFs) stood at 235.2 trillion won at the end of September, having increased by 7.6 trillion won in the third quarter alone. The Bank of Korea is also supplying short-term funds through repurchase agreement (RP) purchases.

A credit analyst at a securities firm said, “This is not a situation where the market has frozen due to a sharp spike in short-term interest rates, as was the case with the Legoland incident or during the COVID-19 pandemic,” adding, “It should be viewed as short-term interest rates, which had been relatively low, rising to align with broader market conditions.”

In fact, demand across the bond market as a whole is showing signs of improvement. According to the asset management industry, while bond funds—which grew by only 700 billion won in the third quarter (totaling 212.9 trillion won as of the end of September)—have seen large-scale inflows this month, the pace of inflows into money market funds (MMFs) has slowed compared to before September. This is interpreted as a decline in the preference for short-term instruments as short-term demand shifts toward medium- and long-term bonds amid falling interest rates.

Corporate bond spreads are also remaining within a narrow range. On the 30th, the spread between 3-year government bonds and “AA-” rated corporate bonds stood at 69.2 basis points, remaining within the 65.9–72.3 basis point range since July. The yield spread between “AA-” rated corporate bonds and commercial paper (CP) narrowed to 60.7 basis points—its narrowest since late February—but observers note that, as the market enters the year-end off-season, the likelihood of a surge in corporate bond issuance is low. Analysts also suggest that since banks preemptively issued bonds before the third quarter, the supply burden of bank bonds at year-end is unlikely to be significant.

The remaining variable is the outcome of the November Monetary Policy Committee meeting. There are forecasts that if the benchmark interest rate is raised further, CP rates will inevitably rise into the 4% range. Some also point out that anxiety could grow if a hawkish signal—exceeding the market’s expected upper limit for a rate hike (3.5%)—is sent.

A credit analyst at another securities firm added, “Year-end is a period when funds flow out and investment demand is low, so spreads may rise seasonally,” noting, “Even if corporate bond issuance resumes early next year, spreads are likely to narrow as funds flood into bookbuilding.”