Rising Government Bond Yields Again, Corporate Bond Investor Sentiment Also 'Uncertain'

After the Jackson Hole Meeting, Before Additional Rate Hike by BOK
Investor Sentiment Improvement Limited... "More Time Needed for Stability"

[Asia Economy Reporter Minji Lee] After the Jackson Hole meeting, as government bond yields surged sharply, the corporate bond market was engulfed in uncertainty. Although investor sentiment has improved for some bonds, overall, due to increased interest rate volatility, it is analyzed that more time will be needed before a stable downward trend is found.

According to the bond industry on the 2nd, as of the previous day, the yield on 3-year AA- corporate bonds was 4.78%, and the 3-year government bond yield was 3.79%. As of the 22nd of last month, the yields on 3-year AA- corporate bonds and 3-year government bonds were 4.23% and 3.24%, respectively, but in less than 10 days, both surged by 55 basis points (1bp = 0.01 percentage points). The yields are higher than the level seen during the sharp rise in June. The credit spread (the difference between the 3-year AA- corporate bond yield and the 3-year government bond yield), which gauges the corporate bond issuance environment, remains at a high level, moving from 98bp to 99bp.

The rise in corporate bond yields following government bond yields was due to the Jackson Hole shock. On the 26th of last month (local time), Jerome Powell, Chairman of the U.S. Federal Reserve (Fed), showed a hawkish stance, leading to analyses that the Bank of Korea would also proceed with further rate hikes. Lee Chang-yong, Governor of the Bank of Korea, mentioned that after the Jackson Hole meeting, the monetary policy would maintain a focus on price stability. Supply and demand pressures also had an impact. Foreign investors have maintained net selling in the government bond futures market for 3-year and 10-year government bond futures, which pushed government bond yields higher. Gong Dong-rak, a researcher at Daishin Securities, said, “The fact that stabilization measures such as simple purchases by the Bank of Korea have not been implemented despite considerable expectations is fueling supply and demand concerns. Considering that U.S. yields did not surge as sharply as the previous peak in June, Korea’s yields have risen relatively steeply compared to other countries.”

As yields fluctuated once again, investor sentiment diverged by bond type. Investor sentiment has improved for high-credit-rated prime bonds and non-prime bonds with attractive yields, but institutions are relatively less willing to open their wallets for bonds with ambiguous mid-level credit ratings such as A or AA-. In fact, Lotte Chemical (AA+), which conducted a demand forecast on the 22nd of last month, raised 14 trillion KRW in orders for a 250 billion KRW issuance of 2-year, 3-year, and 5-year bonds. Due to the stable credit rating and high yields, institutions placed large purchase orders. On the 30th of last month, Korean Air (BBB+) issued 150 billion KRW in corporate bonds and attracted orders totaling 343 billion KRW, more than twice the amount.

Conversely, Lotte Insurance (A-) issued 140 billion KRW in publicly offered subordinated bonds but received orders for only 97 billion KRW, resulting in unsold bonds. Korea Financial Group (AA-) secured 175 billion KRW in funds for a 110 billion KRW 3-year issuance, but the band (-30 to +30bp) was set at the upper limit of the yield. Hanwha Investment & Securities (AA-) postponed a planned public corporate bond issuance of 220 billion KRW at the end of last month.

It is expected that more time will be needed before yields find a stable downward trend. Ahn Young-jin, a researcher at SK Securities, explained, “Despite the government’s announcement of a tight budget plan, it is insufficient to reverse the market sentiment that has turned bearish. Going forward, attention should be paid to whether foreign investors continue their futures selling, the stabilization of the short-term money market around the Chuseok holiday, and whether monetary and fiscal authorities implement measures to stabilize interest rates.”