Concerns are rising in the corporate bond market as market yields including those of short- and long-term treasury notes are exceeding the 3.5 percent benchmark rate on a rebound since the end of May.

According to the Korea Financial Investment Association on Wednesday, the 3-year treasury bond yield stood at 3.5 percent, 5-year at 3.504 percent, and 10-year 3.569 percent during the day, staying above the benchmark rate of 3.5 percent.

The yield on AAA-rated certificates of deposit (CDs) with a maturity of 91 days at commercial banks was also higher at 3.76 percent.

It is the first time in about two months that the yield of major government bonds has exceeded the base rate.

In early March, market yields reached nearly 4 percent on a forecast that the U.S. Federal Reserve will further raise the base rate. They, however, dropped shortly to below the benchmark rate in the wake of the collapse of Silicon Valley Bank and the sale of Credit Suisse.

Market yields at home and abroad are on a rebound now as concerns ease over small and mid-sized banks in the U.S. and higher probability of a base rate hike by the U.S. Federal Open Market Committee (FOMC) in June.

The rise in market yields was also boosted after the Bank of Korea Governor Rhee Chang-yong hinted at the possibility of a rate hike after freezing the benchmark rate last week.

“The 3-year government bond yield, which had been below the base rate since mid-March, rose to near 3.6 percent, taking a turn on the negative carry position,” said Ahn Jae-gyun, an analyst at Shinhan Investment & Securities Co.

“The pace of the rise in the yields has accelerated since the latter half of May, and this is attributable to both internal and external factors.”

Institutional investors that lead the bond market raise funds with short-term investments such as CDs to manage long-term products such as 3-year government bonds.

For this reason, if the long-term interest rate is lower than the short-term interest rate, a negative carry happens where the return on investment is lower than the funding cost.



Yet, in such an environment when institutional investors are not suffering from negative carry, investments in credit bonds, or corporate bonds, increase for a higher yield than 3-year government bonds, making corporate bonds less attractive.

The financial investment industry warns that investors need to take caution in approaching the corporate bond market although the concern is not so big for the second half of the year.

“The credit market is likely to remain stagnant amid uncertainties in the second half of the year and emerge strong toward the year-end,” said Lee Kyung-rok, an analyst at Shin Young Securities Co.

“It will take some time before concerns over the financial system and the real estate market are allayed, and the market is expected to send mixed signals for the time being due to the supply and supplementary budget issues.”

A consultative body consisting of lenders of real estate project financing (PF) from all financial sectors has been launched and financial authorities have also started providing policy support for the securities firms with a high delinquency rate on PF asset-backed commercial papers (ABCPs).

However, time is needed for these measures to have an impact, sources say.

Most of the companies, in the meantime, that have scheduled book building sessions for corporate bond issuance in June, as of Thursday, are rated AA or higher.

On Thursday, Hotel Lotte Co. rated AA- will issue bonds worth 120 billion won ($90.9 million), Hanwha Solutions Corp. (AA-) 150 billion won, Macquarie Infrastructure Corp. (AA) 100 billion won, and DGB Financial Group Inc. Hybrid Tier 1 (AA-) 105 billion won.

On June 7, HD Hyundai Oilbank Co. (AA-) will issue 100 billion won worth of bonds, on June 9, S-Oil Corp. (AA) will issue 240 billion won, on June 15, LG Uplus Corp. (AA) 150 billion won, and on June 22, LG Energy Solution Ltd. (AA+) 500 billion won.

By Kang Bong-jin and Choi Jieun

[ⓒ Pulse by Maeil Business Newspaper & mk.co.kr, All rights reserved]