[Practical Finance] "I Bought Government Bonds via MTS"... Bond Investment A to Z

Net Purchase of Individual Bonds About 5 Trillion KRW in First Half of This Year
Up 88.8% Compared to Last Year (2.7013 Trillion KRW)
Highest Credit Rating for Government Bonds... "Timing for Split Purchase"
Super-Prime Grade 4% Korea Electric Power Corporation Bonds Extremely Popular
NH Investment & Securities, First in Korea to Offer Online Brokerage for Overseas Corporate Bonds

[Asia Economy Reporter Hwang Yoon-joo] Bonds are back. As high-intensity tightening measures have dampened investor sentiment toward risky assets and the perception that bond prices have hit bottom has grown, funds are flowing into the bond market. According to the Korea Financial Investment Association on the 14th, the net purchase amount of domestic bonds by individuals in the first half of this year was 5.1004 trillion won, an 88.8% increase compared to the same period last year (2.7013 trillion won). Recently, securities firms have been expanding bond sales and offering various services. It is not too late yet. This time, we looked into bond investment.

Possibility of Korea-US Base Rate Inversion... What About Bond Investment?

To get straight to the point, the answer is ‘Yes.’ As tightening measures accelerate worldwide, centered on the United States, investor sentiment toward risky assets such as stocks has significantly weakened. Consequently, investment funds are moving toward safe assets. This is why bonds are gaining attention.

The main concern remains the inversion of Korea-US interest rates. Since the U.S. began raising rates in earnest by 25 basis points (bp) in March, the pace of rate hikes has accelerated faster than expected with 50bp in May and 75bp in June (1bp = 0.01%). The Federal Reserve (Fed) is expected to raise rates by 75bp again in July, making the possibility of Korea-US base rate inversion high.

Lee Chang-yong, Governor of the Bank of Korea, is attending the Monetary Policy Committee meeting held at the Bank of Korea in Jung-gu, Seoul on the 13th. Photo by Kang Jin-hyung aymsdream@

The Bank of Korea’s Monetary Policy Committee raised the base rate by 50bp on the 13th. As a result, the base rate increased from 1.75% to 2.25%. If the Fed proceeds with a ‘giant step’ (75bp), the U.S. base rate will become higher starting this month. There are concerns that bond investors sensitive to interest rates, especially foreign investors, may exit the domestic bond market.

Of course, if foreign investors temporarily reduce their bond purchases or sell domestic bonds, domestic investors may incur bond valuation losses. However, experts evaluate that government bonds or corporate bonds with no default risk can provide stable returns.

Professor Kim Young-ik of Sogang University Graduate School of Economics explained, "Volatility may occur depending on the expected inflation in July (announced on the 27th) and the domestic consumer price index in July (announced on August 2), but in the long term, current bond prices are quite low," adding, "If you have a bond investment plan, this can be seen as a buying opportunity."

Order via MTS... Domestic Bonds Can Be Invested in Units of 1,000 Won

Bonds are classified by issuer into government bonds, financial bonds, and corporate bonds. Government bonds are further divided into national bonds (including treasury bonds, foreign exchange stabilization bonds, and fiscal notes), local bonds, and special bonds (issued by special corporations such as KEPCO and LH). Treasury bonds have the highest credit rating with very low default risk and are actively traded.

Bonds can be traded online just like stocks. You can buy and sell directly through MTS (Mobile Trading System) and HTS (Home Trading System). However, not all bonds are available for trading. The bonds available online vary depending on each securities firm's sales and operations.

Foreign corporate bonds can only be purchased through NH Investment & Securities’ MTS. Since June, it has been the first domestic securities firm to start online sales of foreign corporate bonds. Therefore, if the desired bond is not available on your MTS or HTS, you need to check other securities firms’ MTS or visit a branch in person.

Unlike stocks, bonds have a minimum trading amount. However, there is no need to be intimidated. For treasury bonds, the minimum trading amount is 1,000 won. For foreign bonds, it varies by issue.

According to KB Securities, known for its bond retail (individual) sales, the minimum trading amounts are 100 million won for short-term bonds, 100 US dollars face value for U.S. Treasury bonds, and one share for Brazilian government bonds.

Researcher Lim Jae-gyun of KB Securities said, "Whenever upward volatility in interest rates increases, we recommend staggered purchases of long-term bonds," adding, "The possibility of a big step by the Monetary Policy Committee in August has decreased, so short-term rates such as 3-year bonds may fall sharply in the short term, but we maintain the outlook that the 10-3 year spread will narrow and even consider inversion in the mid to long term."

Government Bonds? Corporate Bonds? U.S. Bonds? What to Buy?

The securities industry primarily recommends treasury bonds. They carry no default risk and are actively traded. Because the bid-offer spread (buy-sell quotes) is tighter than other bonds, small investors can easily sell before maturity. Some investors who have invested heavily in treasury bonds even use them as collateral for loans. This reflects the creditworthiness of treasury bonds.

If you want capital gains, long-term bonds are preferable; if you want liquidity management or period yield, short-term bonds (1-year or 2-year) are advantageous. This is because the pace of tightening is expected to peak in the third and fourth quarters of this year, and if signs of economic recession become clear afterward, interest rates may be cut.

Lee Han-gu, a bond specialist at the Korea Financial Investment Association, explained, "The price of long-term bonds moves 5 to 10 won per 1bp (0.01%), while short-term bonds move about 3 won," adding, "During periods of falling interest rates, long-term bonds are advantageous as their prices can rise by 10 won at once, but during rising interest rate periods like now, short-term bonds incur less valuation loss."

[Image source=Yonhap News]

Corporate bonds are also popular. When high-intensity tightening is implemented rapidly like these days, the interest rates on corporate bonds issued by the same company can jump sharply within 2 to 3 months.

KEPCO bonds are a representative example. The 5-year bond issued on January 4 had an interest rate of 2.53% per annum, but the 5-year bond issued on June 22 had an interest rate of 4.48%, rising by 1.95 percentage points in just six months. Considering KEPCO’s credit rating is top-tier (AAA), it is a very attractive investment from an investor’s perspective.

Tax considerations are also important in bond investment. Bonds are subject to a 15.4% tax on interest income. Bonds issued a year ago have lower interest rates, so the tax is also lower, and they can be purchased at prices below face value. However, you must carefully consider what your investment target is, whether it is short-term or long-term, and whether you plan to sell before maturity to determine what is more advantageous for you.

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