Short-term vs Long-term... Diverging Bond Investment Outlook

US FOMC 75bp Rate Hike Confirmed
3-Year & 10-Year Treasury Bonds Hit New Highs
Final Rate Forecast Rises to 4.5%
Mixed Outlook for Domestic Bond Investment
"Mid-Short Term Bonds Bought at Low Prices...Long-Term Bonds Face Greater Uncertainty"
"Increase Long-Term Bond Holdings...Prepare for End of Tightening"

[Asia Economy Reporter Hwang Yoon-joo] The 3-year and 10-year government bonds have hit new yearly highs. Ahead of the U.S. Federal Open Market Committee (FOMC) meeting, where a 75bp (1bp=0.01%) rate hike is expected, the domestic bond market is also experiencing volatility. As the final rate forecast continues to rise, bond investment outlooks are diverging.

According to the Bond Information Center of the Korea Financial Investment Association on the 21st, the 3-year government bond yield in the Seoul bond market closed at 3.823%, up 0.064 percentage points from the previous day. This is the highest level since August 3, 2011 (3.87%). The 2-year bond also recorded a yearly high at 3.810% (+0.046 percentage points).

The 10-year bond yield also reached a yearly high at 3.836% (+0.042 percentage points). The 20-year and 30-year bonds closed at 3.667% (-0.001 percentage points) and 3.626% (+0.018 percentage points), respectively.

On the 16th, an inversion occurred between the 3-year (3.784%) and 10-year (3.774%) government bond yields during the trading session. With expectations of aggressive tightening in the U.S., and forecasts that the Bank of Korea would continue its tightening stance, short-term bonds sensitive to monetary policy surged. Meanwhile, concerns over economic contraction due to tightening caused long-term bond yields to fall, resulting in the inversion.

In Korea, yield curve inversion between short- and long-term rates has occurred only twice during the financial crisis: from November 2007 to January 2008, and for ten days starting July 2008. Generally, yield curve inversion is considered a precursor to economic recession, as recessions in the U.S. have occurred within 1-2 years following such inversions.

[Image source=Yonhap News]

As predictions for the peak interest rate have missed the mark, the bond market’s investment outlook is also divided. The final rate, which the Federal Reserve presents as the last rate in its tightening cycle, is rising again. Market experts have raised their forecasts for the final rate to 4.25?4.5%, whereas just two months ago, market participants predicted a final rate of 3.5?3.75%.

Kim Ji-man, a researcher at Samsung Securities, stated that a low-price buying strategy focused on medium- and short-term bonds under 3 years is necessary. From an investment perspective over the next 3 to 6 months, uncertainty remains regarding long-term bonds.

Researcher Kim analyzed, "I believe that medium- and short-term bond yields have passed their peak," adding, "There remains relatively uncertain factors regarding long-term bond yields." He further explained, "The U.S. final rate is rising, and during this process, U.S. long-term government bond yields are sharply increasing in a short period," suggesting, "There is a possibility that Korea’s long-term bond yields will be affected."

On the other hand, Oh Chang-seop, a researcher at Hyundai Motor Securities, advised expanding bond holdings centered on long-term bonds, as the tightening stance in Korea and the U.S. is expected to conclude in the first quarter of next year. He diagnosed that with the interest rate peaks in Korea and the U.S. expected in the first quarter of next year, the domestic bond yield peak is more likely to occur in the third quarter (while the U.S. peak is expected early next year).

Researcher Oh predicted, "The unexpected acceleration of global monetary tightening this year is, in the mid- to long-term, a factor that increases the attractiveness of bond investments," adding, "Due to global inflation slowdown and recession concerns, bond yields are expected to enter a mid- to long-term downward phase starting next year."

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