"Stop Buying Gold and Crypto"... U.S. Experts Highlight New Investment Destinations Amid Rapid Market Shifts [Practical Asset Management]

Accelerated Rate Cut Expectations: US Bonds in the Spotlight
Liquidity Shifts from Gold and Crypto to Bonds
Cautious Outlook Amid Multiple Variables
Potential for Further Gains in Bio and Small/Mid-Cap Stocks

As a U.S. interest rate cut is anticipated, experts have identified U.S. bonds as a promising investment destination. Consequently, advice is emerging that the proportion of assets such as gold and Bitcoin, which have moved along paths similar to stocks, should be reduced. Photo by AFP Yonhap News

The U.S. Federal Reserve (Fed) is widely expected to cut its key interest rate in September. As a result, investors around the world are focusing on the bond market, anticipating the post-rate cut environment.

Currently, the market's attention is centered on the level of rate cuts that Fed Chair Jerome Powell will announce at the Jackson Hole meeting, to be held in Wyoming, U.S., from August 21 to 23 (local time). One year ago, at the same venue, Powell declared that "the time for rate cuts has come," and promptly implemented a significant 0.5 percentage point cut at the September Federal Open Market Committee (FOMC) meeting.

U.S. President Donald Trump has been openly pressuring for rate cuts. Despite repeated pressure, Powell has maintained a policy of holding rates steady. Powell has recently described the U.S. labor market as "solid" and refrained from signaling a rate cut. However, after the July employment report released on August 1 came in below expectations, the market now sees a September rate cut by the Fed as a given.

Accelerated Rate Cut Expectations... Spotlight on U.S. Bonds

With a U.S. interest rate cut anticipated, experts have identified U.S. bonds as a promising investment destination. Interest rates and bond prices move in opposite directions. When the key interest rate is lowered, the yields on newly issued bonds decrease. This naturally increases the attractiveness of bonds issued during periods of higher rates, driving up demand and prices. As a result, liquidity that could not be absorbed by bonds due to high rates may now flow back into the bond market.

In response, financial institutions have begun to launch related products. Samsung Asset Management has newly listed the 'KODEX US 10-Year Treasury Active (H)' exchange-traded fund (ETF), which invests in U.S. mid- to long-term Treasuries. It allocates up to 30% to U.S. Treasuries with maturities of 7 to 10 years, with the remainder invested in U.S. 10-year Treasury ETFs listed in the U.S. Hanwha Asset Management has also newly listed the 'PLUS US Nasdaq 100 US Treasury Hybrid 50' ETF, a bond-mixed fund that invests 50% in the Nasdaq 100 index and 50% in ultra-short-term U.S. Treasuries with maturities of less than three months.

The effects of policy rate cuts are typically reflected first in short-term rates and then in long-term rates. During a rate-cutting cycle, the 10-year Treasury yield tends to respond more sensitively to rate cuts compared to the 30-year Treasury yield. U.S. 10-year Treasuries also have the advantage of lower volatility, as their duration (weighted average maturity) is shorter than that of 30-year Treasuries.

However, if the popularity of U.S. bonds linked to rate cuts increases, the overall flow of funds in the asset market could shift rapidly, so preparations for this are also necessary. When rates fall, the appeal of government bonds becomes more pronounced, and funds that had previously flowed into risk assets may exit.

Kang Hyunki, a researcher at DB Securities, advised, "Long-term U.S. Treasuries could become a popular investment target, and as a result, there could be an outflow of funds from other assets. It is advisable to increase the proportion of long-term U.S. Treasuries, reduce the proportion of stocks (and within the Korean stock market, increase dividend stocks), and decrease the proportion of assets such as gold and Bitcoin, which have moved along paths similar to stocks."

Persistent Inflation Concerns... Potential Rise in Bio and Small/Mid-Cap Stocks

Although the likelihood of a U.S. rate cut is high, some experts caution that investors should be prudent with bond investments due to inflation concerns stemming from President Trump's tax cuts and tariffs.

In fact, while demand for long-term U.S. Treasuries has continued steadily since last year on expectations of rate cuts, returns have been sluggish. The 6-month return for 'ACE US 30-Year Treasury Active (H)' stands at -2.89%, 'TIGER US 30-Year Treasury Covered Call Active (H)' at -6.62%, and 'TIGER US 30-Year Treasury Strip Active (Synthetic H)' at -5.98%. This is because a large amount of funds had already flowed in earlier at lower rates (higher bond prices).

Han Sanghee, a researcher at Hanwha Investment & Securities, pointed out, "While market participants are convinced of a rate cut, they remain concerned about the supply and demand for U.S. Treasuries due to inflation worries. This is evidenced by investors avoiding long-term Treasuries and instead buying short-term bonds and stocks that benefit from falling rates."

Han also predicted that bio and small/mid-cap stocks, which have underperformed all year, are likely to strengthen. He said, "The Russell 2000 rose 3.9% in August, bio stocks rose 5.3%, and the overall healthcare sector climbed 4.2%. If the FOMC actually cuts the key rate in September and the required rate of return on stocks (Ke) drops as expected, bio and small/mid-cap stocks could see further gains."