"Mid-Term" vs "Long-Term Installments"... Divergent Bond Investment Outlook

3-Year Treasury Bond Yield at 4.1%
10-Year Bond Also Records 4.1% Range
Base Rate Anticipated Above 3.5%

[Image source=Yonhap News]

[Asia Economy Reporter Hwang Yoon-joo] As the year-end policy rate forecast in the U.S. was raised to 4.6% and the end of rate hikes was postponed from the original March to May, indicating that tighter-than-expected monetary tightening will continue, bond investment outlooks are diverging.

According to the Bond Information Center of the Korea Financial Investment Association at 9:39 a.m. on the 23rd in the Seoul bond market, the yield on 3-year government bonds stood at 4.182%. The 10-year government bond yield was also recorded at 4.128%. Long-term bonds closed in the high 3% range the previous day but surpassed 4% after the market opened. This appears to reflect the domestic base rate being priced above 3.5% following the U.S. Federal Open Market Committee (FOMC) results the day before.

With the market shaken by faster-than-expected tightening, investment outlooks are also mixed. Samsung Securities stated that from an investment perspective over the next 3 to 6 months, "there remain uncertainties regarding long-term bonds," and that investing in medium- to short-term bonds is advantageous. The prices of 3-year and 10-year government bonds have fallen by 2.4% and 6.5%, respectively, compared to early August, when prices were highest in the second half of this year.

Kim Ji-man, a researcher at Samsung Securities, said, "As can be seen from the rate of price change, the longer the maturity, the greater the price change rate for the same interest rate change," and added, "Currently, there remain uncertainties about long-term bonds within an investment time horizon of about 3 to 6 months."

Researcher Kim noted, "Around the second quarter of next year, when monetary policy uncertainties are expected to be resolved, moving into long-term bonds can be considered, but for now, buying medium- to short-term bonds at low prices is effective." He pointed out, "If expectations for the peak base rate rise to 3.5%, the 3-year government bond yield will rise to around 4.2%." However, he judged anything beyond that as overshooting. Despite short-term market deterioration, yields above 4% are considered attractive.

On the other hand, given the expected economic hard landing, there is also an opinion that staggered buying of long-term bonds is effective. Im Jae-kyun, a researcher at KB Securities, stated, "We maintain a view of reducing weight in 3-year government bonds and staggered buying of 10-year government bonds when yields rise, with a holding period of less than one year."

Researcher Im predicted, "Due to central bank tightening, both 3-year and 10-year government bond yields will rise to 4.3%, surpassing the previous upper limit of 4.1% during the 2011 rate hike cycle (although the base rate was raised to 3.25%, the base rate at the 3-year government bond peak was 2.75%)."

Previously, the Bank of Korea mentioned that a base rate of 2.25% is the lower bound of the neutral rate, and 2.50% is the midpoint of the neutral rate. Researcher Im explained, "If the base rate exceeds 3%, it enters a tightening zone exceeding the upper bound of the neutral rate, estimated at 2.75%, which is negative for the economy." He added, "The rise in long-term bond yields will be constrained, and the inversion of the long- and short-term yield spread, such as the 10-year minus 3-year government bond yield, will continue."

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