"Have Bond Yields Hit a Ceiling?" Capital Inflows Increase... More Investors Expecting a Peak

[Asia Economy Reporter Lee Seon-ae] Although the bond market was engulfed in 'panic' as bond yields soared to their highest levels, there is now a growing view that bond yields are passing their peak. Funds are flowing into U.S. bond exchange-traded funds (ETFs), and foreign investors are also net buyers of bonds in the domestic market.

According to global financial data provider Refinitiv on the 11th, U.S. bond ETFs have seen net inflows for two consecutive weeks. Kim Hae-in, a researcher at Daishin Securities, said, "In terms of weekly fund inflows, U.S. Treasury ETFs (SCHR, BIL, SHY) and high-yield (HYG) ETFs all recorded net inflows for two consecutive weeks," adding, "This confirms that despite the Federal Reserve's big step (a 0.5 percentage point hike in the benchmark interest rate), investors increasingly expect interest rates to have reached their peak."

The U.S. intermediate-term bond SCHR ETF attracted $1.381 billion last week and $1.545 billion two weeks ago. The U.S. ultra-short-term Treasury ETF BIL and the U.S. short-term Treasury ETF SHY also saw inflows of $1.056 billion and $829 million, respectively. Two weeks ago, $810 million and $299 million flowed in, respectively.

Although there is a lack of bond buyers in the domestic market, concerns about foreign investor outflows have eased, signaling a positive outlook. Since the Federal Open Market Committee (FOMC) meeting in March, foreign investors' demand for Korean won-denominated bonds weakened, and from the last week of March to early April, foreign investors were net sellers of won bonds for about two weeks, raising concerns about foreign outflows. However, foreign investors have since returned to net buying won bonds. Since switching to net buying, foreign investors have purchased about 6.8 trillion won worth of won bonds, significantly exceeding the net selling volume of 2.7 trillion won from late April to early May. The balance of won bonds held by foreigners fell to around 218 trillion won on April 7 but has since recovered to about 223 trillion won, an increase of more than 9 trillion won compared to the beginning of the year.

Kim Ji-man, a researcher at Samsung Securities, said, "Recently, bond yields have risen sharply as future monetary policy expectations have been largely reflected, and bond prices have indeed fallen low enough to stimulate bargain hunting," adding, "The U.S. Consumer Price Index announcement is scheduled for the 11th, and with growing interest in the economy, if it is confirmed that inflation?the main cause of the steep rate hike expectations?has at least passed its peak, a short-term stabilization of yields could be expected."

Jang Hyun-chul, a researcher at Korea Investment & Securities, said, "Due to the rapid rise in inflation, expectations for benchmark rate hikes increased quickly, causing government bond yields to surge. However, as inflation passes its peak in the second quarter, the pace of rate hikes is unlikely to accelerate further," adding, "Therefore, government bond yields are expected to gradually confirm their peak, and the global bond market will pass through its worst phase." He emphasized, "However, given that inflation and rate hikes are still high compared to the past and in their early stages, the possibility of a significant decline in yields remains low."

The domestic bond market, which has been influenced by U.S. yields, is also expected to pass through its worst phase. Unlike the U.S., which prioritizes inflation over the economy, the new governor of the Bank of Korea has stated that both inflation and the economy will be considered. Therefore, the likelihood of accelerated rate hikes is low. Researcher Jang said, "In the short term, rate pressures are likely to persist due to supplementary budgets and a lack of corporate bond demand, but in the medium to long term, the rise in yields is expected to be limited," adding, "Although concerns remain about the weakening of investment attractiveness from a relative perspective due to the possibility of a reversion in the Korea-U.S. benchmark rate differential, investment sentiment, which had deteriorated, is expected to revive once the upper limit of U.S. yields is confirmed."

However, except for foreign investors, the supply and demand conditions in the domestic bond market are not yet favorable. Bond fund capital recorded net outflows of 2.6617 trillion won in March and 1.2724 trillion won in April, and major supply-demand players such as funds and insurance companies have not shown active bond buying. Kim Ji-man said, "Given the uncertainties surrounding inflation and supply-demand conditions, it is not an environment where bond investment can be actively recommended," adding, "Except for foreign investors, there is a lack of active demand for bond purchases, so it is necessary to secure evidence that inflation is easing, and volatile bond market movements are expected to continue for the time being." Han Kwang-yeol, a researcher at NH Investment & Securities, also said, "Although market sentiment is cautious, fundamentals are not highly concerning, and the pace of government bond yield increases is likely to slow, so attention is expected to gradually shift to the attractiveness of bond yields," adding, "However, supplementary budgets and the need for deficit bond issuance are expected to temporarily increase upward pressure on yields."

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