The corporate bond market, frozen by surging interest rates, is seeing supply and demand recover, centered on maturities of two years or less. Analysts say that as the likelihood of an additional benchmark rate hike grows, demand to reduce interest rate volatility risk and secure interest income is leading to a recovery in investor sentiment for short-term bonds.
According to the investment banking (IB) industry on the 28th, funds have recently been concentrating in the two-year-or-less segment in corporate bond book-building. SK Ecoplant received 987 billion won in valid orders against a total of 100 billion won it sought to raise. The 18-month tranche drew 464 billion won, 15.5 times the initially planned 30 billion won, while the two-year tranche attracted 233 billion won, 11.7 times the 20 billion won sought.
A preference for short-term bonds also emerged in KCC's book-building. KCC's two-year tranche drew 685 billion won against 80 billion won sought, recording a competition ratio of 8.6 to 1. The three-year tranche also attracted 700 billion won against 120 billion won sought, but its competition ratio was 5.8 to 1, lower than that of the two-year tranche.
This concentration in supply and demand is interpreted as the effect of expanded carry demand, as the possibility of an additional benchmark rate hike by the Bank of Korea has been pre-reflected in short-term bond yields. Still, it is too early to judge that the overall corporate bond market has entered a recovery phase. Volatility in long-term rates remains high due to the burden of government bond supply stemming from economic recovery and expanded fiscal spending. Some analysts say the ability to respond flexibly to interest rate volatility, compared with long-term bonds, also worked positively for the popularity of short-term bonds.
In particular, there is considerable view that the upside for long-term rates should be kept open, as economic growth momentum is likely to be maintained, including a favorable semiconductor cycle, a recovery in domestic demand, and the government's aggressive fiscal expansion stance. Kim Sung-soo, a researcher at Hanwha Investment & Securities, said, "We view the three-year treasury bond yield of 3.9% as having risen excessively." He explained, "Even if the growth forecast is revised upward in next month's updated economic outlook, if the benchmark rate is held, the three-year rate could gradually decline, but for long-term rates, it is appropriate to set the ceiling higher considering growth and fiscal policy."
Eased outflows from money market funds (MMF) and bond funds, along with still-limited corporate bond supply, are cited as factors that allowed companies recently conducting book-building to secure funds relatively stably. Kim Sang-in, a researcher at Shinhan Securities, noted, "If no additional credit events occur, credit strength could emerge going forward as the ceiling for the benchmark rate is confirmed and money move pressure eases." He added, "In the second half, along with eased supply burdens, a settling of the money move that has weighed on credit demand is also expected."
