Fear of 'R' Leads to Tightening Speed Adjustment... Treasury Bond Buying Signal?

30-Year Korean Treasury Bond Investment ETF Up 10% This Month
Linked to Bond Prices, Profits When Interest Rates Fall
Market Expects Fed Rate Cuts Next Year

[Image source=Yonhap News]

[Asia Economy Reporter Minji Lee] As the global financial market is overshadowed by the ‘fear of R (Recession)’, there are forecasts that the tightening intensity of major central banks will be lower than expected. The US 10-year Treasury yield, which showed a rate spike above 3% last month, has also been declining, causing government bond yields to surge.

According to the Korea Exchange on the 7th, the KBSTARKIS Treasury Bond 30-Year Enhanced ETF has posted double-digit returns this month. Although it plummeted more than 26% from January 3rd to the end of last month, it has reversed this trend since the beginning of this month. This ETF tracks the KIS Treasury Bond 30-Year Enhanced Index. It allows cash borrowing at 30% of the total for three 30-year government bonds, enabling a leveraged effect where investments can be made with more than the principal amount. During the same period, the HANARO KAP Ultra-Long Treasury Bond ETF posted a 5.57% return, while KOSEF Treasury Bond 10-Year (3%) and WOORI Korea Treasury Bond Active (3.3%) also recorded positive returns.

Bond prices and interest rates have an inverse relationship. When interest rates rise, bond prices fall, and when interest rates fall, bond prices rise. Since government bond ETFs are linked to bond prices, they can profit when interest rates decline. Currently, the US 10-year Treasury yield is maintaining around 2.9%. It surged to about 3.5% in mid-last month, reflecting the Federal Reserve’s strong intention to raise rates, but dropped by 70 basis points (1bp = 0.01 percentage point) in less than a month.

The rise in bond prices (fall in interest rates) was triggered by concerns over a potential economic slowdown. Initially, market experts projected a year-end benchmark rate of around 4%, viewing the market more conservatively than the Fed’s 3.5% target. However, the combination of supply chain disruptions and demand slowdown reversed market sentiment with fears of a recession. Although the Fed forecasts a 4% benchmark rate in 2023, the market expects a shift to rate cuts next year.

Minyoung Park, a researcher at Shinhan Financial Investment, analyzed, “The market is shifting its focus to the impact of intense tightening on the real economy,” adding, “Expectations that demand slowdown will lead to inflation easing along with recession risks are increasing the possibility of market interest rate declines.” On the 1st, the Atlanta Federal Reserve’s ‘GDPNow’, which provides real-time US GDP forecasts, projected a -2.1% economic growth rate for the second quarter.

Although expectations for falling bond yields are growing, it is important to keep in mind that high volatility may persist for some time. The Fed’s determination to control food-related prices and US economic indicators exceeding expectations could trigger a rebound in interest rates. In the near term, US employment data releases are likely to influence the direction of interest rates.

Jaegyun Lim, a researcher at KB Securities, explained, “Even if volatility increases, it is necessary to make staggered purchases of government bonds,” adding, “The possibility of a global recession is negative for the Korean economy, and considering the high level of household debt and interest burdens, the perception that the Bank of Korea’s rate hike cycle has entered its later stages will be formed.”