[Challenge Bond Ant] ② Interest Rate Decline... Accumulating High-Grade Bonds, Focus on Short-Term Bonds

Government Bond Yields Fall from 4% to 3% Range
Investment in A- Grade and Below Corporate Bonds Requires Further Monitoring

[Asia Economy Reporter Minji Lee] Although the stock market rebound has continued this year, the prevailing analysis is that a full-fledged rise is premature. As a result, the bond investment fever that started last year remains strong in the new year. Quick-moving bond retail investors secured higher returns than deposit interest rates by purchasing a large volume of long-term bonds when bond yields surged due to the 'Legoland incident' in the second half of last year, and they also actively bought financial products investing in corporate bonds with attractive yields.

Interest in bond ETFs continues as well. According to the financial investment industry on the 16th, from the 1st to the 12th of last month, domestic individual investors purchased 41.3 billion KRW worth of TIGER 24-10 Corporate Bond (A+ or higher) Active. This exchange-traded fund (ETF) mainly invests in high-quality corporate bonds and bank bonds rated A+ or higher, maturing in October 2024. Unlike existing bond ETFs whose yields fluctuate with market influences, if the ETF is held until maturity without selling, it has a structure that can secure the agreed yield.

Individuals also bought a lot of bond ETFs such as KBSTAR 23-11 Corporate Bond (AA- or higher) Active (19 billion KRW), KODEX U.S. Treasury Ultra 30-Year Futures (17 billion KRW), KODEX 23-12 Bank Bond (AA+ or higher) Active (14.8 billion KRW), and KBSTAR 25-11 Corporate Bond (AA- or higher) Active (9 billion KRW). Although individual bonds can be purchased through securities firms' HTS (Home Trading System), bond ETFs are an easier investment target that provides access to a wider variety of bonds.

Bond retail investors have so far focused on purchasing long-term government bonds and high-grade corporate bonds, aiming for interest income and capital gains. The 30-year government bond yield, which soared to 4.39% at the end of October last year, dropped sharply to 3.4% as of the 12th. During the same period, the 10-year government bond yield also fell from 4.6% to 3.4%. Investors who bought government bonds at yields in the 4% range can expect interest payments at maturity along with capital gains from bond price increases (bond yield declines).

Investment sentiment also concentrated on high-grade bonds rated AA or higher. Especially in the fourth quarter of last year, when bond yields surged due to the Legoland incident, inquiries from individuals eager to invest in Korea Electric Power Corporation (KEPCO, AAA) bonds or bank bonds offering yields in the 5% range flooded in.

However, under the current market trend, it has become difficult to generate the same profits with the existing bond investment methods. This is because bond yields are sharply declining due to government liquidity supply measures and expectations of interest rate cuts. Since the decline in yields is progressing faster than expected, new investors entering bond investment now are unlikely to achieve the same returns as those who invested early in the second half of last year.

A bond management official at a mid-sized securities firm said, “Bond yields have dropped sharply within a month, resulting in returns lower than deposit interest rates. It is difficult to meet the yield expectations of individual customers, so we are considering including lower-rated A-grade corporate bonds, but there is much concern as the direction of U.S. interest rates is unclear.” In fact, in the secondary market, high-grade bonds can only be purchased at a premium. In the primary market, companies such as LG Uplus (AA), Emart (AA), and KT (AAA) all recorded successful demand forecasts.

Experts advise maintaining a strategy of actively purchasing long-term bonds when interest rate volatility is high, but to focus on short-term bonds if expectations of rate cuts intensify. This is based on the judgment that buying long-term bonds now will not yield significant profits due to the sharp decline in rates. Rather, as the economic downturn intensifies, it is also valid to pay attention to short-term bonds while anticipating a pivot (policy shift) by the U.S. Federal Reserve (Fed). A securities firm official said, “Investing in long-term bonds now does not seem attractive due to low returns. Although there may be high volatility in interest rates due to many market-impacting events, future profits are expected to be greater from declines in short-term bond yields.”

It is advisable to take a more cautious stance on lower-rated corporate bond investments. Especially for corporate bonds rated A- or below, considering the overall situation such as the economic downturn, there is concern that credit ratings may be further downgraded to BBB (high-yield level) during the regular credit rating review season in April-May. Kim Ki-myeong, a researcher at Korea Investment & Securities, analyzed, “Considering the possibility of continued funding market tightening for lower-rated bonds, liquidity pressure may be greater. Demand for lower-rated bonds will increase when the real estate market recovers and the funding market stabilizes overall.”