The shock from rising U.S. interest rates is reverberating through South Korea's bond market, raising concerns that corporate financing costs could surge. With a significant number of corporate bonds maturing by the end of the year, the refinancing burden is expected to increase. The liquidity divide among companies based on credit ratings is likely to deepen further.
On September 14, according to global financial information platform Investing.com, the yield on the benchmark U.S. 10-year Treasury note rose to 5.012%. This marks the first time since 2023 that the yield has exceeded 5%. The increase is attributed to a combination of geopolitical tensions in the Middle East, rising international oil prices, renewed inflation concerns, and the U.S. fiscal deficit and Treasury supply pressures.
Additionally, the possibility of the U.S. Federal Reserve raising interest rates is adding upward pressure. The Fed is set to hold a Federal Open Market Committee (FOMC) meeting on September 17 to decide on interest rates. Currently, the rate stands at 3.50% to 3.75%, with the market estimating a roughly 90% chance of a 0.25 percentage point increase. If implemented, this would be the first rate hike in nearly three years.
An increase in the benchmark rate will inevitably raise financing costs for South Korean companies. Since U.S. Treasury yields serve as a benchmark for global financial markets, the domestic bond market is also expected to feel the impact. Even if a company's credit rating remains unchanged, rising yields on government bonds will lead to higher rates for new corporate bond issuances and refinancing existing bonds.
The domestic market has already begun to reflect these shocks. On the previous day, the yield on three-year government bonds closed at 4.025%, up 12.5 basis points (1 basis point = 0.01 percentage points) in a week. The yield on 10-year bonds also rose by 15.1 basis points to 4.536%. The yield on three-year corporate bonds rated AA- increased by 11.3 basis points to 4.690%, nearly 20 basis points higher than the end of last month (4.516%).
The issue is that a large number of corporate bonds are set to mature in the second half of this year. From now until the end of December, the total amount of maturing corporate bonds is expected to reach 18.2552 trillion won, approaching 19 trillion won. This is an increase of 3.2241 trillion won (20.5%) compared to the same period last year. In September alone, 3.4221 trillion won is due, followed by 7.0738 trillion won in October, 5.3673 trillion won in November, and 2.3920 trillion won in December, meaning over 10 trillion won must be repaid or refinanced by next month.
Companies looking to refinance maturing bonds will face even greater cost burdens. Issuing new bonds at the current elevated interest rates will result in higher interest payments. Some companies may opt to repay using cash reserves or seek alternative financing methods such as bank loans. However, if the trend of rising market rates continues, these alternative options will also be affected by higher interest rates.
The polarization in financing among companies is expected to become more pronounced. Well-established firms with strong financial structures and cash flows may continue to issue corporate bonds despite higher rates. In contrast, lower-rated companies may struggle to secure sufficient funds even if they offer higher interest rates. During periods of rising rates, investors tend to prefer safer, high-quality bonds, leading to liquidity issues for small and medium-sized enterprises.
Cho Hye-kyung, head of the Financial Economic Research Institute, stated, "As we transition back to a high-interest rate era, market rates will continue to rise, and the bond issuance market is nearly in a state of collapse. When government bond yields increase, private bond yields will rise even more, significantly increasing corporate financing costs."
* This article has been translated by AI.
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