Institutional Investors Withdraw Amid Bond Market Freeze, While Retail Investors Keep Buying Relentlessly

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[Asia Economy Reporter Lee Seon-ae] Amid a series of adverse events that have frozen investor sentiment and sharply reduced the overall net bond purchases, individual investors' net purchases have surged instead. It is interpreted that they have started investing with the expectation that a recovery will occur once the interest rate hike cycle ends in the first half of next year.

According to the Korea Financial Investment Association on the 6th, the total net bond purchases last month amounted to 27.2 trillion won, a 41.49% decrease compared to the same period last year. The largest decline was seen in asset management companies (public and private), whose net bond purchases dropped 57.26% from 9.1 trillion won to 3.9 trillion won. Banks followed, decreasing 40.99% from 21.3 trillion won to 12.5 trillion won, while other corporations (-31.38%) and foreigners (-19.87%) also significantly reduced their net purchase volumes. Insurance companies reversed from net purchases of 5.4 trillion won to net sales of 2.2 trillion won. This was due to the sharp rise in interest rates and inflation levels this year and the economic downturn, which lowered insurance subscription capacity and worsened the financial conditions of insurance companies.

According to Korea Ratings, life insurance premium income in the first quarter of this year decreased by 10% compared to the same period last year, and the insurance industry is expected to face difficulties defending operating performance in the second half due to increased cancellations and declining retention rates. In contrast, individual net purchases during the same period increased nearly fourfold, from 600 billion won to 2.3 trillion won.

As the stock market continued to underperform this year, bonds, considered relatively safe assets, attracted new investment, leading to a large influx of individual investors. According to KB Securities, among the 14,289 customers who purchased bonds at KB Securities this year, 63.5% were either inexperienced in bond investment or new customers who opened accounts for the first time this year.

While individual interest in bonds, which had been somewhat unfamiliar, was growing, liquidity tightening originating from the bond market dealt a blow to the entire financial industry. Especially after the market plunged into chaos due to the Legoland incident at the end of September, followed by the recent non-fulfillment of the call option (early redemption) by Heungkuk Life Insurance, adverse events have continued to deepen the instability in the bond market.

As institutional investors withdraw from bonds, individuals may also gradually lose trust in bonds as safe assets and exit. Yoon Yeo-sam, head of the bond department at Meritz Securities, said, "If problems such as actual bankruptcies or insolvencies occur among construction companies or securities firms, bond investment sentiment will freeze, and individual investors buying bonds will decrease." However, he added, "Individual investors are not as sensitive to bond prices as institutions. Currently, absolute interest rates are high, and government bonds have tax benefits, so there is room for continued individual interest in bonds."

Experts predict that bond investment will revive after the first quarter of next year. Shin Han-investment Securities researcher Ahn Jae-gyun analyzed, "As domestic and international interest rate hikes conclude by the end of the first quarter next year, major bond yields will form a peak. The bond investment sentiment, which has been at its worst contraction, will recover from the end of the first quarter and strengthen as the year progresses."

NH Investment & Securities researcher Han Gwang-yeol explained, "If the previously announced market stabilization policies are implemented sequentially, concerns about liquidity in the short-term money market and some companies will gradually decrease. The recent downward stabilization of domestic and international government bond yields will also act as a factor boosting investment sentiment in the bond market."

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