Korean CP yields stop run-up but at highest levels

The borrowing rates in commercial papers (CPs) in South Korea have recently shown signs of stabilization but they are still at their highest levels following their run-ups in the previous months, suggesting the country’s debt market remains jittery.

According to the Korea Financial Investment Association on Monday, the 91-day A1 rated CPs‘ yields remained at 5.54 percent, unchanged from the previous trading day. It is the first time that the yield has stayed the same with the previous day after its uninterrupted gains since Sept. 22, a few days before the Korean debt market took a hit from a default in asset-backed commercial paper (ABCP) financing related to Legoland theme park in Gangwon Province.

The CP yield topped 5 percent on Nov. 9 and reached 5.5 percent in about two weeks. The rate hit 5.54 percent on Dec. 1 and has been left in that level for two days, raising hope that the country’s debt market would stabilize.

However, the level is still the highest in nearly 14 years since January 12, 2009 in the aftermath of the global financial meltdown, reflecting lingering market concerns about real estate project financing-related asset-backed commercial papers (ABCP) triggered by the Legoland fiasco.

The credit spread between government bonds and corporate debts remains wide at 176 basis points on Monday after widening to 162.3 basis points on Nov. 17, the largest since the global financial crisis.

Despite the Bank of Korea’s 25 basis point hike late last month, the credit spread remains high, with the yield on corporate bonds falling at slower rates. The wider the credit spread, the more the market sees investment risk in corporate bonds.

Experts noted that investors remained wary about the debt market while expecting the market will remain instable until the BOK’s next monetary policy meeting in January. The key to determine the market direction would be the country’s real estate market and related project financing next year, market analysts said.

State-run Korea Electric Power Corp. (KEPCO), meanwhile, sold AAA-rated bonds Monday amid overwhelming demand. It raised 360 billion won ($276.2 million) for two-year bonds at a yield of 4.8 percent, and 80 billion won for three-year bonds. On Sept. 21, KEPCO bonds were sold at 4.97 percent yield for papers with two and three-year maturity and 5 percent afterwards.