[Practical Finance] Mobilizing All Safe Assets Like Deposits and Bonds... The End of the High-Interest Era Is Far Away

Commercial Bank Deposits Also at 5%... Flood of High-Interest Deposit Products
Seeking Additional Earnings Through Collateral Loans and Prepayment Deferrals
Active Bond Investments... Strategies Targeting Capital Gains and Tax Savings

[Image source=Yonhap News]

[Asia Economy Reporters Yu Je-hoon and Lee Min-woo] Office worker Kim Kyung-eung (36, pseudonym) started investing in stocks earlier this year after a friend's recommendation but faced a bitter experience. Although the investment amount was not large, around 5 million won, the stock prices plummeted, resulting in a return rate of -50%. Kim said, "If I had just put the money into a 3-4% deposit back then, I think I could have at least earned enough for chicken," adding, "For now, I plan to keep a lump sum in deposits."

As the outlook that the high interest rate era will continue at least until the first half of next year becomes widespread, the trend toward safe assets is intensifying. Financial consumers are mobilizing all their spare funds into safe assets such as deposits and bonds amid the ongoing weakness in the asset market.

'The heyday' of deposits and savings... 'The art of management' must also be utilized

With the continuation of the high interest rate era, high-interest products are pouring out from regular deposits and savings accounts to parking accounts at commercial banks. According to the 'Weighted Average Interest Rate of Financial Institutions in September 2022' announced by the Bank of Korea at the end of last month, the regular deposit interest rate at deposit banks in September was 3.35%, surpassing 3% for the first time in 9 years and 8 months since January 2013. The one-year regular deposit interest rates at major commercial banks such as KB Kookmin, Shinhan, Hana, and Woori Bank have already risen to the 4% range. Some products even exceed an annual interest rate of 5%. For example, SC First Bank's 'e-Green Save Deposit' offers up to 5.10% interest for a 12-month term, the highest level among commercial banks. Jeonbuk Bank, BNK Busan Bank, and Gwangju Bank have also introduced regular deposit products with interest rates in the 5% range.

The regular deposit interest rates at savings banks have already reached 6%. Products such as KB Savings Bank's 'KB e-plus Regular Deposit' and Daishin Savings Bank's 'Smart Revolving Regular Deposit' offer 6% annual interest for a 12-month term. If the subscription period is extended to 24 months, there are products exceeding 6%, such as Korea Investment Savings Bank's 'Non-face-to-face Regular Deposit (6.10% annual interest)'.

Mutual finance institutions are continuously launching 'special offer' products. On the 27th of last month, Gwanak Credit Union introduced the 'Special Offer Union Regular Savings' (1-year maturity) with an annual interest rate of 10%. Without any special preferential interest conditions or limits, the online product sold out within 6 minutes with a scale of 35 billion won. The Saemaeul Geumgo Huam-dong branch also launched a regular deposit product offering up to 7.79% interest on the 3rd and sold out. Since news of product launches spreads quickly through financial communities and text notifications from branches, it is important to actively gather information.

There is also advice that one should not only focus on high-interest products but also utilize the 'art of management.' Examples include deposit-secured loans and 'prepayment deferral.' Deposit-secured loans are loans executed using the balance of a housing subscription savings account or deposits and savings as collateral. Typically, the limit is about 95% of the saved amount, and the interest rate is about 1 to 1.25 percentage points higher than the subscribed product. If this is executed and the funds are placed into various high-interest deposit products, the difference in interest rates results in a gain. Usually, this method is used to finance money without canceling products nearing maturity when urgent funds are needed, but during a rising interest rate period, it is used as a kind of arbitrage.

Prepayment deferral is a technique that operates fixed installment savings (regular savings) together with lump-sum savings (regular deposits). If the agreed monthly installment in the savings is paid in advance, 'prepayment days' occur; if paid late, 'deferred days' occur, and this difference is utilized. A representative example is the '6-1-5' form in a 12-month maturity savings, where six installments are paid in advance in the first payment, one installment is paid in the following month, and five installments are paid just before maturity. By paying this way, the maturity date is not delayed, and normal interest can be received. Therefore, if the amount for the seventh month’s one installment and the five installments paid just before maturity are each invested in regular deposit products in the first and second half of the year, additional income can be earned beyond the maturity interest of the savings.

Individuals become major players in the bond market... Focus on tax-saving bonds

Although the mood has somewhat dampened due to the Legoland incident and Heungkuk Life's call option non-exercise incident, the bond market, including government and public bonds, remains one of the representative investment destinations sought by financial consumers looking for safe assets. While institutional buying has weakened due to market tightening, individuals are emerging as 'major players.'

According to the Korea Financial Investment Association's Bond Information Center, individual net purchases of domestic bonds last month amounted to 2.3135 trillion won, four times the 568.6 billion won in the same month last year. During the same period, banks' net bond purchases decreased by 41% to 12.5 trillion won, and insurance companies reversed from net purchases of 5.3934 trillion won in October last year to net sales of 2.2319 trillion won in October this year.

Previously, bonds with relatively low credit ratings but high interest rates, such as credit finance bonds and corporate bonds, were popular, but recently, as the bond market has fluctuated, even these individuals have increasingly invested in stable bonds such as government and public bonds, according to industry explanations. As of the 7th, the 3-year Korea Electric Power Corporation bond (AAA rating) yields 5.771%, surpassing the interest rates of most commercial bank deposits and savings.

Among bonds, the popularity of 'tax-saving bonds' remains strong. Tax-saving bonds refer to bonds with relatively low coupon rates paid at maturity. These low-coupon bonds issued in the past have seen their market prices fall due to this year's sharp rise in interest rates. Purchasing these bonds and trading them at face value at maturity results in interest income being taxed (15.4%) but no separate tax on capital gains, providing a tax-saving effect, hence the name.

Kim Hak-soo, team leader at Hana Bank Apgujeong PB Center, explained, "Although institutional bond investment sentiment has deteriorated recently due to incidents like Legoland, many investors are considering bond purchases focusing on low-default-risk bonds such as KEPCO bonds and power generation bonds," adding, "Moreover, even amid these circumstances, the number of financial consumers trying to increase yields through tax-saving bonds is increasing."

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