Korean corporate bonds are back as rate panic subsides for now

An employee at Hana Bank’s Counterfeit Notes Response Center in central Seoul organizes Korean currency on Nov. 1. [YONHAP]

Korea's corporate bond market is starting to recover as signs suggest that rates may be peaking.

Sentiment has done an about-face from just weeks ago, when fears spread that trade in these debt instruments was seizing up and large corporations were having trouble tapping the credit markets.

"Sentiment has improved in the corporate bond market," said Yoo Seung-woo, an analyst at DB Financial Investment.

Transaction volume for corporate bonds with maturities of five years or more was 201 billion won ($154 million) in the second week of December, compared to 500 million won Nov. 14 through 18, according to Nice Investors Service, a Seoul-based credit rating firm.

In the same period, trade in corporate bonds with a maturities between three and five years rose to 233 billion won from 30.3 billion won. Transaction volume for corporate bonds with maturities shorter than a year fell to 1.35 trillion won from 1.42 trillion won during the same period.

“Yields for corporate bonds have been very attractive, but investors did not buy them actively because they expected the yield to rise further as a result of hawkish central bank monetary policy,” Yoo said.

Yields for AA- corporate bonds with three-year maturities was 5.386 percent as of Tuesday morning compared to 2.399 percent a year earlier.

“But talk on the Fed’s slowing rate increases has surfaced. Stabilization of the foreign exchange rate also gives room for the Bank of Korea to decide the base interest rate more independently from the Federal Reserve,” Yoo added.

Federal Reserve Chairman Jerome Powell said last month that the Fed was “slowing down” the pace of increases, after upping them three-quarter percentage points at a time since June.

FedWatch, which is run by the CME Group and forecasts rates using Fed Fund futures contract prices, put the chance of a half-point increase at 77 percent on Tuesday. The Fed will report its decision on rates on Wednesday.

The Bank of Korea raised its rate by a quarter percentage point to 3.25 percent in November.

The won is in the low 1,300-to-the-dollar range after hitting 1,444.2 won on Oct. 25. But the local currency is still down around 10 percent in dollar terms on year.

China’s relaxation of its zero-Covid policy following recent protests is also lifting Korea’s bond market sentiment.

“The Chinese economy weakened in the wake of the zero-Covid policy. That also affected foreign investor investment in the Korean market as they usually group Korea and China when they make investments,” Yoo added.

Lockdowns in some of districts in Guangzhou were lifted in late November.

Korea faced a liquidity crunch following the rapid rise of rates, a Legoland-linked debt default in September and Heungkuk Life Insurance’s delay in a planned redemption of a perpetual bond in November.

The yield on commercial paper with 91-day maturities was 5.52 percent as of Tuesday compared to 1.52 percent in the same period a year earlier.

The liquidity crunch forced financial authorities to take measures, including the Bank of Korea’s announcement earlier this month to buy up to 2.5 trillion won of repurchase agreements to help some financial institutions make their contributions to a market stabilization fund.

BY JIN MIN-JI [jin.minji@joongang.co.kr]