Domestic Bond Funds Set New Record with 8 Trillion KRW Outflow on the 18th

18 Consecutive Trading Days of Net Outflow...Longest Record Ever
Movement Away from Safe Assets Amid Interest Rate Uncertainty and Stock Investment Frenzy
Liquidity Supply from Bond Funds Expected to Re-attract Capital

[Asia Economy Reporter Minwoo Lee] In the domestic bond fund market, net outflows have continued for 18 consecutive trading days, with more than 8 trillion won withdrawn. Both the duration of continuous net outflows and the scale of net outflows are record-breaking. Despite the unstable stock market, funds have continued to flow out of bond funds, which are relatively safe assets. Analysts suggest that concerns over interest rate instability and the 'Donghak Ant Movement,' where individual investors flock to stock investments, have influenced this trend.

According to the Korea Financial Investment Association on the 14th, excluding exchange-traded funds (ETFs), the domestic bond fund market experienced net outflows for a total of 18 trading days from the 17th of last month to the 9th of this month. This surpassed the previous longest record of 16 consecutive trading days of net outflows (November 22, 2019; October 19, 2017; February 7, 2007). The total amount withdrawn during this period was 8.0758 trillion won. Compared to the previous 16-day consecutive net outflow period, when about 2.3 to 3.49 trillion won was withdrawn, the scale is approximately 3.4 times larger.

The net outflow trend was observed throughout last month. A total of 8.1 trillion won was withdrawn from bond funds last month. As a result, net assets decreased by 7.1% from the previous month to 114.4357 trillion won. This contrasts with stock funds, which saw a net inflow of 2.2 billion won despite the KOSPI index falling to 1,457.54, its lowest in 10 years and 8 months.

The main reason cited is interest rate instability. Bond funds invest in government and corporate bonds to earn interest income and capital gains. Therefore, when interest rate instability occurs, causing the interest rate spread (credit spread) between government bonds and corporate bonds to widen, funds tend to flow out. If corporate bond interest rates rise relative to government bond rates, the cost of issuing corporate bonds increases, worsening the corporate bond market. The 3-year government bond yield fell from 1.128% on the 1st of last month to 0.996% on the 13th, a drop of 13.2 basis points (bp) (1bp = 0.01%). During the same period, the yield on AA- rated unsecured 3-year corporate bonds rose from 1.728% to 2.120%, an increase of 39.2bp. The credit spread with government bonds reached 112.4bp, the highest in 10 years since March 4, 2010 (113bp).

There is also analysis that the active participation of individual investors in the stock market contributed to this. Along with expectations of an all-time low, funds that had fled to safe assets like bonds are moving to risk assets such as stocks. The investor deposit balance held in securities accounts for stock purchases averaged 44.6534 trillion won this month. On the 1st of this month, it reached a record high of 47.6669 trillion won, which is 168% of the average daily deposit of 28.3935 trillion won in January.

Poor returns on bond funds are also a cause. According to financial information provider FnGuide, the average return over the past week (as of the 13th) for 959 domestic equity funds with assets over 1 billion won was 7.59%, while the return for 266 bond funds was only 0.22%. Expanding the period to the past month, the return dropped to -0.11%. Kim Young-ik, adjunct professor at Sogang University Graduate School of Economics, explained, "The 3-year government bond yield has fallen below 1% for the first time, reducing expected profits from bonds," adding, "It seems that people who entrusted their money to funds are now directly entering the stock market."

However, there are also forecasts that funds will flow back into bond funds as stock market volatility subsides. As of the 10th, after 18 trading days, the domestic bond fund market saw a net inflow of 58.2 billion won. Since the government is implementing financial market stabilization policies totaling 42 trillion won, including a 20 trillion won Bond Market Stabilization Fund and a 10.7 trillion won Stock Market Stabilization Fund, it is expected to ease investors' concerns. If institutions like the Bank of Korea supply liquidity to the market, corporate bond yields may fall, improving bond fund returns.

Kim Chang-hoon, a researcher at KB Securities, said, "Through overall financial market stabilization and policy responses, the 3-year government bond yield is at an all-time low," adding, "Since the Korean economy still appears capable of positive growth, expectations for future base rate cuts are forming, but liquidity support will take priority."

This content was produced with the assistance of AI translation services.