Retail investors flock to bonds amid peak interest rate theory... Nearly 20 trillion won in six months

$600 Million Flows into US 20-Year+ Long-Term Bond Triple-Leveraged ETF

This year, individual net bond purchases have nearly reached last year's annual level. This is because the perception that benchmark interest rates set by the U.S. Federal Reserve (Fed) and others have peaked is spreading, leading individuals to flock to the bond market.

According to the Bond Information Center of the Korea Financial Investment Association as of the 16th, individual net bond purchases amounted to 18.0883 trillion won. This represents an approximately 300% increase compared to the same period last year (4.4496 trillion won), approaching about 90% of last year's annual net purchases.

The surge in individual investors' bond investments began last year. Due to rapid interest rate hikes increasing market instability, individual net bond purchases, which were only 4.5675 trillion won in 2021, ballooned nearly fivefold to 20.6113 trillion won. This is because investors' demand concentrated on bonds with high yields such as corporate bonds and asset-backed securities.

This year, as market expectations grow that interest rate hikes by the Fed and other central banks are entering their final stages, long-term bonds are gaining attention. The Fed held the Federal Open Market Committee (FOMC) meeting last week and, while suggesting the possibility of further rate hikes, kept the benchmark interest rate unchanged. This is the first rate freeze in 15 months. Some in the market even anticipate possible rate cuts within the year.

Typically, interest rates and bond prices have an inverse relationship. When interest rates fall, bond prices rise, allowing for capital gains. Long-term bonds, in particular, experience greater price fluctuations due to interest rate declines compared to short-term bonds, and the period to realize capital gains is longer, making them attractive during rate cuts.

In fact, looking at net purchases by bond type this year, long-term government bonds had the highest net purchases at 6.7406 trillion won, followed by corporate bonds (4.4655 trillion won), asset-backed securities (3.968 trillion won), and bank bonds (1.6895 trillion won). This contrasts with last year, when net purchases were highest for corporate bonds (7.9955 trillion won), asset-backed securities (5.8512 trillion won), government bonds (2.9861 trillion won), and special bonds (1.9134 trillion won).

With growing expectations for interest rate cuts, interest in aggressive investments is also increasing. According to the Korea Securities Depository, domestic investors have net purchased about 675.8 million dollars of the ETF ‘Direxion Daily 20+ Year Treasury Bull 3X (DIREXION DAILY 20+ YEAR TREASURY BULL 3X SHS ETF)’, which tracks U.S. long-term government bonds over 20 years threefold. This amount is nearly ten times the net purchase of the famous overseas stock Tesla (approximately 76.92 million dollars).

However, since the Fed continues to indicate the possibility of additional rate hikes, a more cautious approach is advised. A representative from a commercial bank said, “As the perception that rate hikes are entering their final stage spreads, cases of betting on long-term bonds and even 3x leveraged ETFs with the expectation of capital gains from future rate cuts are increasing. However, since the Fed is still mentioning additional rate hikes and negative factors such as the U.S. commercial real estate downturn have not completely cleared, a cautious approach is necessary.”