South Korea’s corporate bond market is enduring a prolonged deep freeze as high interest rates persist amid the Bank of Korea’s rate-tightening stance. With bond-buying demand weakening under the supply burden of expanded government bond issuance, many companies are shelving corporate bond sales and diversifying their funding through bank loans and short-term financing. Market participants say the chill is severe enough to recall the Legoland crisis of late 2022, when a sharp spike in rates triggered a liquidity crunch.
The yield on three-year corporate bonds rated AA- from blue-chip large companies stood at 4.486% as of the 11th, according to the Korea Financial Investment Association on the 12th. That marks a jump of 158.7 basis points (a basis point equals 0.01 percentage point) from a year earlier, when the same yield stood at 2.899%. It has climbed more than 100 basis points this year alone, holding in the mid-4% range. Expectations that the central bank could raise its base rate further this month are adding to the tension. Rising long-term global rates in the United States, Japan and Europe are also pushing domestic market rates higher.
The sharp rise in rates has led to reduced corporate bond issuance. So far this year through the 11th, corporate bond issuance totaled 79.36 trillion won ($57.5 billion), down about 8.4% from 86.65 trillion won in the same period last year. By contrast, redemptions over the same period rose to 74.51 trillion won from 65.37 trillion won. The shift suggests companies are repaying maturing bonds with cash on hand or bank loans rather than issuing new bonds to refinance.
Lower-rated, non-blue-chip corporate bonds are more vulnerable to the shock. While buyers such as SK hynix (000660.KS) and the Bond Market Stabilization Fund are standing by for high-grade bonds rated AA0 or above, the pool of investors willing to absorb lower-grade bonds rated A+ or below has shrunk sharply. Non-blue-chip bonds issued in the public and private markets this year totaled 5.97 trillion won, down about 43% from 10.45 trillion won in the same period last year. That decline exceeds the 37% drop in high-grade bond issuance.
An investment banking industry official said companies are shifting maturing bond volumes to bank borrowing as the corporate bond market slumped this year.