Samsung Securities analyst Kim Eun-ki reported that corporate bond issuance in July sharply declined except for major securities firms, marking an early arrival of the off-season. The decline stems from significantly elevated issuance rates, with AA- grade 3-year corporate bonds approaching 4.5% in June — a rise of approximately 100 basis points from the start of the year. Kim noted that short-term funding rates for 3-month certificates of deposit and commercial paper remain substantially lower than 3-year corporate bond rates, reducing companies' incentive to issue bonds. This contrasts with typical seasonal patterns where issuance increases from late July through mid-August ahead of semi-annual reporting deadlines.
Corporate Bond Rates Rose 100 Basis Points from Year-Start
Kim stated that government bond rates climbed steadily from the beginning of the year, driving corporate bond issuance rates higher. In June, AA- grade 3-year corporate bond rates approached 4.5%, representing an increase of approximately 100 basis points compared to the start of the year. The analyst attributed weak issuance demand to the widening gap between short-term rates and longer-term corporate bond yields.
Short-Term Funding Rates Maintain 150bp Advantage Over Corporate Bonds
Short-term rates rose modestly in July due to base rate hike expectations and semi-annual fund outflows in June, but the increases remained limited to around 5 basis points. Kim reported that the spread between certificates of deposit and 3-year government bonds stands at approximately 80 basis points, while the gap between commercial paper and AA- grade 3-year corporate bonds reaches around 150 basis points. The analyst assessed that the rate advantage of short-term funding remains substantial.
Samsung Securities Analyst States Recovery Unlikely Until Early Next Year
Kim evaluated that even during the September-October peak issuance season, a full recovery in issuance will be difficult. He stated that given the current 150-basis-point spread between short-term rates and corporate bond rates, even if short-term rates rise by 40-50 basis points, corporate bond rates would still be approximately 100 basis points higher, limiting issuance demand. The analyst added that during the current rate hike period, corporate bond investment demand remains weak, raising concerns about wider issuance spreads. Kim assessed that recovery may occur by early next year when bond fund inflows could narrow issuance spreads and boost investment demand.
FAQ
What caused the decline in corporate bond issuance in July?
Samsung Securities analyst Kim Eun-ki reported that issuance declined sharply due to significantly elevated rates, with AA- grade 3-year corporate bonds approaching 4.5% in June — approximately 100 basis points higher than at the start of the year. Short-term funding rates for 3-month certificates of deposit and commercial paper remain substantially lower, reducing companies' incentive to issue longer-term bonds.
How large is the rate difference between short-term funding and corporate bonds?
Kim stated that the spread between certificates of deposit and 3-year government bonds stands at approximately 80 basis points, while the gap between commercial paper and AA- grade 3-year corporate bonds reaches around 150 basis points. Short-term rates rose only about 5 basis points in July despite base rate hike expectations and semi-annual fund outflows in June.
When does Samsung Securities expect corporate bond issuance to recover?
Kim assessed that recovery will be difficult even during the September-October peak season due to the persistent rate advantage of short-term funding and weak investment demand during the rate hike cycle. He stated that recovery may occur by early next year when bond fund inflows could narrow issuance spreads.
