"Only Interest Rates Will Fall"... Individuals Bought Over 3 Trillion Won in Bonds This Year

Buying High-Interest Capital Bonds and A-Rated Corporate Bonds
Continued Purchase of Ultra-Long-Term Bonds Based on Peak Benchmark Rate Assessment

[Asia Economy Reporter Minji Lee] This year, individual investors' enthusiasm for bond investments is heating up. In particular, there is strong buying interest mainly in long-term bonds with long maturities. This is interpreted as reflecting the judgment that, with the U.S. Federal Reserve (Fed) slowing the pace of interest rate hikes, only interest rate declines remain ahead. Since bond prices move inversely to interest rates, high interest rates mean bond prices are low.

According to the Korea Financial Investment Association, as of the 8th of this month, individual net purchases of bonds in the over-the-counter bond market have reached 3.6 trillion won this year. After buying bonds worth 3 trillion won in September last year, the bond buying momentum seemed to slow down with 2.3135 trillion won in October, 2.2491 trillion won in November, and 1.6094 trillion won in December, but bond investment has increased again this year. Although individual net purchases decreased at the end of last year due to increased uncertainty over interest rate hikes and the postponement of the financial investment income tax, demand to buy bonds while prices are low has increased as interest rate decline forecasts emerged.

Looking at the investment proportions of individuals in the over-the-counter market this year, other financial bonds issued by card companies, securities firms, and capital companies were the largest at 1.4 trillion won. Corporate bonds (1.0606 trillion won) and government bonds (746.4 billion won) followed. Capital bonds were accumulated because they were relatively cheap and had high interest rates compared to other bonds. At the end of December last year, capital bonds recorded interest rates in the 6% range for 3-year AA- grade bonds, higher than corporate bonds (AA) or card bonds (AA), which recorded interest rates in the low 5% range.

Researcher Kim Jiman of Samsung Securities said, “As buying sentiment for high-interest bonds strengthens, individuals increased purchases of capital bonds, which have higher ratings and higher interest rates compared to A+ grade corporate bonds,” and added, “As interest rate levels have lowered compared to before, investors’ attention will shift to corporate bonds with lower credit ratings.”

Additionally, individuals continued investing in long-term government bonds. According to Samsung Securities, the bond most purchased by individuals in the past month was the 20-year maturity government bond known as Gukgo 01125-3909(19-6), with purchases amounting to 390 billion won. Individuals also bought 25 billion won worth of the 10-year maturity government bond Gukgo 01375-3006(20-4). The 30-year maturity government bond Gukgo 03125-5209(22-9) also appeared for the first time among the top net purchase items. As the strong U.S. interest rate hike trend softens, demand to engage in duration betting (the average recovery period of investment funds) has increased. Duration betting is a strategy to gain profits from bond price increases when market interest rates fall as the base interest rate decreases.

Experts expect individual net bond purchases to increase further as opinions that the base interest rate has peaked gain traction. The stock market is hesitating around the 2500 level, and bank deposit and savings interest rates are not attractive. However, they advise that the bonds to invest in should vary depending on the timing and duration before investing in bonds. Although the 3-month return of long-term bond ETFs recently exceeded 20%, investing in long-term bonds now can be beneficial or detrimental depending on the investor. If looking for bonds that can generate profits in the short term, it is advantageous to seek high-grade short-term credit bonds.

Lee Euntaek, head of the investment strategy team at KB Securities, explained, “If the purpose is to invest in bonds long-term, incorporating long-term bonds into the investment portfolio at this point is also a method.” Investment strategy team leader Jang Heejong said, “While the decline in long-term government bond yields remains valid, considering that market interest rates have fallen significantly compared to before, new investors should approach long-term government bond investments cautiously.”