Safe assets are best... The pace of 'bond money move' is accelerating

Complex Economic Crisis Risk

'Best Strategy' Despite Low Returns

Institutions Concentrate on High-Quality Bonds

Recent Corporate Bond Yields Approaching 5%

Funds Also Moving Toward Bond Types

[Asia Economy Reporters Junho Hwang, Soyeon Park] 'Defense is the best investment.' The underlying psychology behind the domestic investment market's 'big players' shifting funds from stocks and alternative investments back to the bond market is a defensive mindset preparing for the worst-case scenario where a 'perfect storm' of multiple economic crisis risk factors simultaneously materializes.

◇ Institutions and Experts Worry About the 'Perfect Storm'... Preference for Safe Bonds Despite Low Returns = The target returns by asset class set by Noryanwoosang at the beginning of this year were 6.37% for stocks, 2.65% for bonds, 4.17% for alternative investments, and 1.25% for short-term funds. Due to the nature of bonds, the target return was significantly lower. Looking at last year's actual returns by asset class, bond investments showed markedly lower returns compared to stocks and alternative investments in terms of asset growth. However, in the 'dark age' of investment where everything is uncertain, most Chief Investment Officers (CIOs) agree that investing in safe bonds is the 'best strategy' to protect assets managed for public interest. An investment officer at Institution A warned, "The U.S. will strongly withdraw the money injected during the Trump administration and the COVID-19 situation," adding, "The U.S., confronting China and Russia, will not hesitate to make any sacrifice to maintain the dollar's value as the 'key currency'." Song Doohan, Deputy Director of the Democratic Research Institute, also expressed concern, saying, "We are at a point where a bubble asset collapse is highly worrisome," and warned, "The worst scenario could be the collapse of cryptocurrencies, stock markets, real estate, and commodities in staggered timing."

In this situation, institutional funds are particularly concentrating on high-quality bonds. In the public bond market, the concentration on AA-rated or higher high-quality bonds is intensifying. Last month, KT (AAA-rated) and LG Uplus (AA-rated), which conducted public bond demand forecasts, attracted funds close to three to four times their target amounts. In the same month, Posco (AAA-rated) also received orders amounting to trillions of won during its public bond issuance demand forecast. The target amounts were set at 300 billion KRW for 3-year bonds and 100 billion KRW for 5-year bonds, but orders reached 1.465 trillion KRW, about four times the target. Recently, corporate bond yields issued by high-quality companies are approaching 5%. For example, the 2-year corporate bond issued last month by Emart, rated AA, had a yield of 4.7%, about 1 percentage point higher than the 3.82% yield of bonds issued in the same month last year. Simply calculated by amount, interest income has increased by about 23%.

◇ Individual Investors Seeking 'Bond Vaccine' Amid Crisis Concerns = As concerns about economic recession grow, quick moves by individual investors to secure stable returns and defend against economic downturns are also observed. According to the Korea Financial Investment Association, individual investors have net purchased corporate bonds worth a total of 2.7777 trillion KRW in the over-the-counter bond market from the beginning of this year to April 4. Compared to the same period last year, this is a 126.5% increase from 1.2265 trillion KRW. A massive shift toward bond-type funds has also begun in indirect investment products such as funds. According to the fund rating company FnGuide, bond-type fund assets increased by 88.2 billion KRW over the past six months. Excluding equity funds, this was the largest inflow of funds. Although 661.2 billion KRW was withdrawn from general bond funds (including mixed bonds such as government bonds and corporate bonds), funds invested purely in government bonds (179.1 billion KRW) and corporate bonds (570.2 billion KRW) increased by 749.4 billion KRW.

Especially, funds are flowing into corporate bond funds. Geum Jeongseop, Head of ETF Marketing at KB Asset Management, analyzed, "The credit spread (interest rate difference) between government bonds and corporate bonds has widened more than during the COVID-19 crisis, making corporate bonds more attractive among bonds with the same maturity." For example, investing in the 'KBSTAR Medium-Term High-Quality Corporate Bond ETF,' which invests in corporate bonds with an average maturity of just over 2 years, can yield an annual return of 4.2% if held to maturity. As interest rate attractiveness increases, ultra-short-term bond ETFs have also established themselves as a tool for short-term fund management. The 'Samsung KODEX KOFR Interest Rate Active ETF,' which tracks Korea's first risk-free benchmark KOFR index, secured 1 trillion KRW in net assets within 57 days after its listing in April. As of the 5th, net assets reached 1.2734 trillion KRW. Lim Taehyuk, Head of ETF Management at Samsung Asset Management, stated, "Due to the base rate hike, inquiries from institutional investors for bond-type products, especially ultra-short-term bond ETFs, are flooding in," adding, "Individual investors can easily purchase ETFs within securities accounts, increasing demand to use them as short-term management tools to seek reinvestment opportunities."