'Interest Rate Cut Still Far'... Individual Investors Reduce Investment in Government Bonds

Net Purchase Volume of Government Bonds Peaks in April and Declines
Bond Investment Valuation Losses, Investor Sentiment Weakens Amid Prolonged Tightening

As interest rates surpassed 4%, individual investment sentiment has significantly weakened. The net purchase trend of government bonds by individuals peaked in April and has been declining since. This reflects a cautious stance amid expectations that the timing of interest rate cuts will be later than anticipated.

According to the Korea Financial Investment Association, from the 1st to the 23rd of this month, the net purchase amount of government bonds by individuals was 503 billion KRW. It recorded the highest scale of the year, rising from 462.3 billion KRW in January to 1.5522 trillion KRW in April, but buying momentum has since decreased. The total net purchase amount of bonds also hit a yearly high in April at 4.2479 trillion KRW.

The contraction in government bond investment sentiment is largely due to interest rates. Contrary to previous expectations, there is a growing outlook that the tightening stance will continue longer. On the 19th (local time), Jerome Powell, Chair of the U.S. Federal Reserve (Fed), stated at a New York Economic Club meeting that "inflation remains too high." His remarks were more hawkish than the market had anticipated. He added, "The good numbers in recent months are only the beginning of building confidence that inflation is sustainably declining toward our target," emphasizing, "My colleagues and I remain united in our efforts to sustainably bring inflation down to 2%."

Following Powell’s remarks, the U.S. bond market contracted. The 10-year U.S. Treasury yield reached 5.001% intraday, surpassing 5.0% for the first time since 2007. As a result, the 10-year Korean Treasury bond closed at 4.362% on the 20th, the highest level since the Legoland incident on October 24 last year.

Earlier in the year, as expectations arose that the tightening cycle was nearing its end, individual investors aggressively invested in bonds. However, strong U.S. economic indicators reduced the likelihood of an economic slowdown. Meanwhile, the outbreak of war between Israel and the Palestinian militant group Hamas earlier this month heightened concerns about fiscal deficits and inflation, pushing bond yields higher.

The 10-year Korean Treasury bond yield rose from 3.811% on January 2 to 4.374% on October 23. After hitting a yearly high immediately following Powell’s remarks, it reached a new peak again. During the same period, the 3-year Treasury bond yield also increased from 3.782% to 4.055%. Consequently, individual investors who aggressively invested in bonds, judging it to be the latter half of the rate hike cycle, are presumed to be experiencing losses.

According to FnGuide data, the returns of government bond funds with relatively large net assets over the past six months have been below expectations. Kiwoom KOSEF 10-Year Treasury Bond ETF (bond) -5.53%, Hanwha ARIRANG 30-Year Treasury Bond Active ETF (bond) -14.52%, KB KBSTAR KIS 30-Year Treasury Bond Enhanced ETF (bond) -19.20%, Mirae Asset TIGER Mid-Long Term Treasury Bond ETF (bond-derivative type) -3.26%, Korea Investment ACE 10-Year Treasury Bond ETF (bond) -5.56%, Samsung KODEX 30-Year Treasury Bond Active ETF (bond) -13.81%, all recorded losses. Even funds with positive returns posted gains around 1%.

A bond official at the Korea Financial Investment Association explained, "Individual investors who were active in investing early this year likely recorded valuation losses in bonds. Their capacity for additional purchases has probably decreased, and with expectations for interest rate cuts pushed back to the second half of next year, a cautious atmosphere has deepened."

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