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Investors are flocking to low-rated corporate bonds as top-rated bonds have become less attractive amid a fall in market yields.
According to data from Yonhap Infomax and Hyundai Motor Securities Co. on Wednesday, the net issuance of AAA-rated corporate bonds stood at 910 billion won ($689.8 million) this year as of Tuesday.
The monthly net issuance was 180 billion won, which is more than half of last year’s average of 300 billion won.
The net issuance of bonds rated AA or lower, on the other hand, stood at 5.8 trillion won during the same period. The net issuance of A-rated corporate bonds rose to 800 billion won.
The amount is in stark contrast to the net issuance volumes of last year when both AA-rated and A-rated bonds delivered minus figures of 4.4 trillion won and 6 trillion won, respectively.
Net issuance of bonds refers to the total amount of bonds issued during a given period except for matured ones. A negative value in net issuance indicates more bonds were redeemed than issued during a period.
The mixed demand has been led by a decline in market yields that are below the benchmark rate. The coupon rate for a corporate bond is calculated by a sum of treasury yield and spread.
The annual yield on treasuries with 3-year and 5-year maturity remained below 3.5 percent as of Tuesday to stand at 3.373 percent and 3.385 percent, respectively.
The weak yields on top-rated corporate bonds led to soaring demand for alternative bonds with lower credit ratings as investors seek higher returns.
“The decline in market yields has reduced investment demand for higher-graded bonds,” said Ahn So-young, an analyst at Hanwha Investment & Securities Co.
When the volatility of interest rates is high, investors are likely to get the best return possible by buying bonds at high interest rates and then selling the notes with rates on the decline because bonds have an inverse relationship to interest rates.
Weaker volatility means less chance of investors gaining profits in their investments.
AA-rated Samchully Co., Korea’s largest city gas distributor, gained traction from its recent book-building session conducted prior to debt issuance.
According to multiple sources from the financial industry, the gas distributor won orders worth 685 billion won, which is more than 4 times the initial target for the issuance of 2-year- and 3-year bonds worth 150 billion won.
Samchully, which has a natural gas supply unit, gained such robust demand from investors despite concerns that the recent massive sell orders made through SG Securities Korea Co. could trigger a decline in investment sentiment for corporate debt.
Some market insiders, however, are concerned about the uncertainty concerning AA-rated or lower bonds as such low-grade bonds are vulnerable to potential project financing risk.
“Industries will likely suffer more pressure from higher borrowing costs and interest rates following the 2 years of rate hikes,” said Jung Hye-jin, an analyst at Shinhan Investment Co. “The overwhelming borrowing costs can reduce corporate profitability and force companies with A or lower grades to fall into credit adjustments.”
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