[Practical Finance] Interest Rates Near Peak... Time to Catch the Last Train for Deposits and Bonds

Individual Investors Rush to Buy Bonds... Already 25 Trillion Won This Year
4-5% Fixed Deposits Also in Focus... Banks Compete to Retain Customers
"Rate Cuts Unlikely, But Further Hikes Difficult"

Idle funds in the market are once again turning to safe assets such as deposits and bonds. This comes amid growing expectations that central banks around the world, including the U.S. Federal Reserve (Fed) and the Bank of Korea, will maintain current interest rate levels for the foreseeable future, leading to the judgment that interest rates have reached their peak. As deposit products offering 4-5% interest rates are reappearing one after another at banks and other deposit-taking institutions, there is an analysis that now is an opportune time to invest in safe assets.

According to the Bond Information Center of the Korea Financial Investment Association on the 5th, individual investors have net purchased bonds worth 25.3845 trillion won from the beginning of this year through the 4th. This has already surpassed last year's total net purchase volume of 20.6113 trillion won. In March alone, they bought 3.1735 trillion won worth of bonds. Excluding banks, this net purchase volume is even larger than that of major players such as mutual savings banks and vaults (680.8 billion won), funds and mutual aid associations (1.4763 trillion won), and insurance companies (2.2416 trillion won).

Investment sentiment has also focused on long-term government bond exchange-traded funds (ETFs) listed in Korea and the U.S. Individual investors have net purchased 161.4 billion won worth of 'ACE U.S. 30-Year Treasury Active (H)' since the beginning of this year. Despite the price dropping about 12% based on closing prices from the day after its listing in March until recently, buying momentum has continued. 'KBSTAR KIS Treasury Bond 30-Year Enhanced' was also net purchased by 5.3 billion won this month.

The bond investment craze among individuals began last year. This was when the Bank of Korea started sharply raising its base rate in response to the global tightening trend. Recently, the perception that interest rates have peaked has spread, intensifying investment sentiment. Investing at the peak interest rate period maximizes interest income, and if interest rates fall afterward, prices rise, allowing investors to also gain capital gains.

Traditional safe assets like deposits are also favored by investors. Signs of a recurrence of the 'reverse money move' phenomenon seen last year are emerging. As of the end of last month, the balance of time deposits at the five major commercial banks (KB, Shinhan, Hana, Woori, NH Nonghyup) reached 844.9671 trillion won, increasing by 11.9859 trillion won in just one month. In July, the time deposit balance also rose by 10.707 trillion won compared to the previous month.

In particular, as bank bond yields continue to rise and the maturity of high-interest time deposits secured last year begins, deposit-taking institutions are reintroducing products with interest rates in the 4-5% range one after another. Among commercial banks, SC First Bank has launched a deposit product with an annual interest rate of 4.10%, while DGB Daegu Bank offers the DGB Together Deposit (4.05%) and iM Smart Deposit (4.00%), sh Suhyup Bank has the sh First Meeting Preferential Deposit (4.02%), and BNK Busan Bank offers the Special Sale Time Deposit (4.00%).

In the secondary financial sector, products offering interest rates in the 5% range have also been introduced. Mutual savings banks and mutual finance sectors, which aggressively secured high-interest deposits in the second half of last year, are now releasing products to regain those deposits. For example, Guui Plaza Saemaeul Geumgo recently launched the ‘MG The Banking Time Deposit’ offering up to 5.53% annual interest (12-month maturity).

The renewed popularity of safe assets is interpreted as reflecting the view that while the current base interest rate is unlikely to rise further, it is still a long way from a point where rate cuts can be expected. Fed Chair Jerome Powell reiterated the existing policy at a meeting held in Jackson Hole, Wyoming, on the 24th of last month (local time), stating, "We are prepared to raise rates further if necessary and will maintain high rates until we are confident inflation is falling to target levels."

Bank of Korea Governor Lee Chang-yong also recently revealed at the Monetary Policy Committee meeting that six members are considering raising the base rate by 25 basis points (1bp=0.01%) to 3.75%. A representative in charge of asset management (WM) at a commercial bank said, "The prevailing view is that the current base rate level will not rise further but may persist for a considerable period," adding, "Among customers with a stable investment tendency, many are interested in building asset portfolios through time deposits or bonds."