The domestic corporate bond market is once again engulfed in tension. With 23 trillion won in corporate bonds maturing during the second quarter, the credit spread has recently widened following the announcement of reciprocal tariffs by the United States. The widening of the credit spread is directly linked to rising corporations' fundraising expenses, raising concerns that interest burdens on corporations are becoming increasingly real.
According to the Korea Financial Investment Association on the 22nd, the interest rate gap between three-year government bonds and AA- rated corporate bonds (three years, non-guaranteed) recorded 0.59 percentage points on the 21st. This figure, which is broader than the 0.56 percentage points recorded on the 19th of last month, marks a return to an upward trend. This level is similar to that on December 5 last year, shortly after the declaration of a state of emergency.
◇ Widening credit spread, rising after U.S. tariff imposition
The credit spread refers to the interest rate that corporations pay in addition to government bond rates when issuing bonds. The larger the figure, the more risk premium bond investors are demanding. Small to medium-sized enterprises or corporations with lower credit ratings face a greater burden.
The credit spread maintained a relatively stable level of 0.59 percentage points until the end of last year; however, it surged to 0.65 percentage points due to the simultaneous declaration of a state of emergency in December and the replacement of government bond benchmarks. On December 27, when the impeachment motion against Han Duck-soo passed the National Assembly, it rose to 0.69 percentage points. Following a partial resolution of political instability, it fell to 0.56 percentage points, but has returned to an upward trend due to U.S. tariff issues.
Typically, when new government bonds are issued, securities firms replace existing government bonds with new ones through transactions, and this process leads to an increase in government bond purchases, thus widening the credit spread. Under normal circumstances, such an expanded credit spread would contract within 1 to 2 weeks. However, at the end of last year, political uncertainty compounded the situation, resulting in a prolonged high level.
Market experts believe that the background for the current widening of the spread is more influenced by external variables from the United States than by domestic political risks. Kim Sang-man, a researcher at Hana Securities, noted, "The direction of the credit spread is open upwards," adding that "while domestic political uncertainty has decreased compared to before, uncertainty over U.S. tariffs is currently having a significant impact on the overall bond market."
Amid this situation, the concentration of maturing amounts for corporations is adding additional burdens. According to the Korea Financial Investment Association Bond Information Center, the total amount of corporate bonds maturing during the second quarter (April to June) is expected to reach 23.1749 trillion won. This represents approximately 29% of the total amount of corporate bonds maturing this year (79.1061 trillion won). In other words, nearly one-third of all corporate bonds are set to mature within the second quarter.
The issue is that when the credit spread rises during such a concentrated maturity period, refinancing may not proceed smoothly, potentially leading to liquidity tightening. Corporations with lower credit ratings are likely to experience greater difficulties in refinancing, which in turn increases the risk of corporate defaults.
In September 2022, the credit spread expanded to 0.98 percentage points due to the Legoland insolvency, leading to a series of failures in refinancing at business sites and subsequent chain bankruptcies among construction companies.
◇ Authorities remain vigilant... "100 trillion won market stabilization program underway"
So far, the general consensus is that it is difficult to assert that corporate bond investment sentiment has deteriorated sharply. However, with downward economic risks gradually becoming more pronounced, if political and diplomatic risks also coincide, there is a possibility that the market could contract rapidly. In fact, as the U.S. has recently intensified its tariff war against China, concerns about the profitability of domestic export corporations are also growing.
Korea Credit Rating Agency warned in a report released at the end of last year that "if a significant credit risk (credit event) occurs in any facet of the direct or indirect financial market such as short-term financing or corporate bonds, it could serve as a considerable trigger for the capital market when combined with the declining economic environment and fragile investor sentiment."
In response, the financial authorities are closely monitoring the situation and maintaining an emergency response system. The authorities are still operating a 40 trillion won bond market stabilization fund and a corporate bond and commercial paper purchase program initiated right after the declaration of a state of emergency, preparing to inject funds immediately if necessary. On the 7th, prior to the imposition of reciprocal tariffs, Financial Services Commission Chairman Kim Byeong-hwan indicated that they would prepare a market stabilization program totaling 100 trillion won, including the bond market stabilization fund.
However, despite these measures, the factors contributing to market instability are not easily resolved. Researcher Kim Sang-man emphasized that "as domestic and external uncertainties persist, market fatigue is gradually accumulating," adding that "the domestic credit bond market is currently at a critical turning point."