[PB Notebook] Avoid Vague Expectations of Interest Rate Cuts... A Mix of Bonds and Risk Investments

Yushin Ik, Economist at KB Kookmin Bank WM Star Advisory Group

This year marks the year when the U.S. Federal Reserve (Fed) declared the possibility of lowering the benchmark interest rate. With the U.S. leading potential rate cuts, there is also an expectation that other advanced countries' central banks will follow suit. Consequently, there has been talk that it is beneficial to gain capital gains through bond investments during the period of benchmark rate cuts.

However, there are aspects to consider. The U.S. benchmark interest rate is still at 5.25?5.5%, but recently, the interest rate on the 10-year U.S. Treasury bond has been hovering around 4.2?4.4%. In other words, U.S. government bonds are currently about 0.75?1 percentage points lower than the benchmark rate. This is because many investors who highly anticipate the Fed’s rate cuts in 2024 have preemptively invested in U.S. Treasury bonds.

It is true that the Fed has projected about three rate cuts this year. However, recently, actual rate decision committee members have stated that “the outlook for rate cuts and the actual number of rate cuts may differ.”

In fact, U.S. inflation remains in the 3% range, and the economy itself continues to show a favorable trend, so there is no strong justification for rapid rate cuts. Additionally, the labor market maintains near full employment, reducing the risk of decreased household income or consumption.

In other words, the U.S. economy is likely to remain stable for a considerable period, and inflation is expected to hover around 3% for some time, which may somewhat diminish the rationale for the Fed’s rate cuts.

The current total liquidity (M3) in the U.S. is also recorded at $20.7 trillion (approximately 28,532 trillion KRW). Considering that the highest liquidity period in 2022 reached $21.7 trillion (approximately 29,911 trillion KRW), although it has decreased, it remains at a significant level.

Moreover, expectations for a real industrial revolution involving artificial intelligence (AI), robotics, and other technologies are growing within the U.S. If household consumption continues at a moderately favorable pace, corporate profits and performance could also improve.

One should not hold vague expectations solely on the “benchmark interest rate cuts” that everyone talks about. It is a rational time to appropriately time bond investments during periods when market interest rates rise due to inflation concerns in the mid to long term. Also, it seems ideal to pursue a risk investment strategy by making appropriate investments in innovative companies that can sustain growth amid the favorable U.S. economic trend.