[PB Notebook] In the Era of High-Interest Shopping, Focus on Low-Coupon Bonds and New Capital Securities

3.0%. This is the benchmark interest rate achieved by the Bank of Korea's Monetary Policy Committee through five rate hikes this year, including two big steps. The benchmark rate in the 3% range is the first in 10 years since October 2012, which means the level of shock felt by investors and the market is considerable.

But this is not the end. The market expects the Bank of Korea to implement an additional big step by raising the benchmark interest rate by 50bp (1bp=0.01%) at the last meeting remaining this year in November. As a result, the interest rates on regular deposits at commercial banks are approaching 5% per annum, and due to inflationary pressures, both domestic and international benchmark rates are expected to continue rising for the time being. This is why wealthy individuals visiting private banking (PB) centers recently are turning their attention to wealth management strategies that actively utilize safe assets such as deposits and bonds offering high interest rates.

Among the products gaining attention in such a rapidly changing market are 'parking accounts.' A parking account is a demand deposit product that allows you to earn interest even if you deposit money for just one day, similar to parking a car temporarily. It combines the advantage of earning interest during periods of rapid rate hikes with the flexibility of anytime deposits and withdrawals. Similar products include Money Market Deposit Accounts (MMDA), Money Market Funds (MMF), and Comprehensive Asset Management Accounts (CMA). These also offer interest rates of around 2-3% per annum, like parking accounts.

Additionally, considering that interest rates are expected to continue rising, it is recommended to operate short-term deposit products by subscribing to fixed deposits with short maturities of 3 to 6 months, allowing you to switch to deposit products offering higher interest rates during the final phase of the Bank of Korea's rate hikes.

Bond investment is also emerging as a portfolio management tool. In particular, 'zero-coupon bonds' that offer tax-saving benefits are quite popular. Investing in AA-rated or higher corporate bonds with about 2 years remaining maturity (with coupon rates in the 1% range) provides tax benefits and allows for a strategy of holding to maturity or selling early depending on future interest rate movements. Zero-coupon bonds issued during past low-interest periods with low coupon rates can now be purchased below their issue price due to recent bond price declines caused by rising bond yields, and the capital gains from such trades are currently tax-exempt under the tax law. Since the proportion of interest income subject to interest income tax is relatively low in bond investment returns, it is advantageous for tax savings. Unlike deposits, bond products generally do not allow or have limited early redemption, so this aspect must be carefully checked before subscribing.

As volatility in the global stock market increases, the investment appeal of Equity-Linked Securities (ELS) is also rising. Since the reference price has dropped while coupon yields have increased, it is considered a good time to invest in ELS. ELS are products that pay (redeem) promised returns if the underlying assets, such as indices or stocks, move within a predetermined range over a certain period. The more the index has fallen significantly from its peak, the better the opportunity for ELS investment. Most ELS have a maturity of 3 years, but early redemption is possible every 6 months if conditions are met, ensuring liquidity. By carefully selecting the underlying assets and early redemption structure, investors can achieve stable returns of 5-9% per annum while hedging against market volatility.

Hybrid capital securities also offer higher interest rates compared to bonds of the same rating, and domestic commercial banks are attractive investment destinations due to their solid fundamentals. Hybrid capital securities are bonds issued by companies to raise capital, and in cases of bankruptcy, rehabilitation, or liquidation, investors may not receive full compensation. Although they appear very risky as a grade 1 (highest risk) product, the credit ratings of domestic financial companies issuing hybrid capital securities are AAA (according to Korea Ratings). Recently, the coupon rates have been in the mid-5% range annually, with interest paid quarterly. Recently, bank hybrid capital securities that pay interest monthly have also been launched, gaining great popularity. Monthly interest payments provide the advantage of generating stable monthly cash flow, and large banks have excellent capital adequacy and asset soundness, making them highly attractive investments. However, since hybrid capital securities are investment products, investors should carefully consider their investment preferences, subscription periods, available funds, and medium- to long-term financial plans before investing.

Ji Gwang-ok, Head of PB Team, Shinhan PWM Seoul Finance Center

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