US long-term bond funds inflow… Investments in emerging countries such as India are also hot
The bond investment fever is gaining momentum after Federal Reserve Chairman Jerome Powell’s remarks suggesting a rate cut. As the interest rate cut that the market has been eagerly waiting for since the end of last year becomes certain, even those who were hesitant to invest are betting on bonds. The fact that the possibility of a Fed ‘big cut’ (0.5%p cut) is not completely ruled out due to renewed concerns about a recession is also good news for bond investment. Since bond prices move inversely to interest rates, the bigger the cut, the greater the profit. This is why investment funds are pouring in even though the impact of the interest rate cut is already largely reflected in bond prices.
Yen hedge investment strategy is fading
The most notable bonds are, of course, US long-term bonds. The stability of the US, combined with the high profitability of long-term bonds, make them highly preferred by investors. According to ‘ETF Check’ by IT company Koscom, many domestic listed index funds (ETFs) that have seen a lot of fund inflows in the past month (as of September 4) include US long-term bond products. ‘TIGER US 30-Year Treasury Premium Active (H)’ was 120.2 billion won, ‘KODEX US 30-Year Treasury + 12% Premium (Synthetic H)’ was 78.8 billion won, and ‘ACE US 30-Year Treasury Active (H)’ was 73.8 billion won (see table). The buying trend was mainly led by individuals. During this period, individuals net-purchased KRW 72.2 billion (60%) worth of TIGER US 30-Year Treasury Premium Active (H) and KRW 46.9 billion (60%) worth of KODEX US 30-Year Treasury + 12% Premium (Synthetic H). Investors also included US long-term bond ETFs traded on the New York Stock Exchange. According to the Korea Securities Depository, during the same period, domestic investors purchased $51.69 million (approximately KRW 69.04 billion) worth of ‘ISHARES 20+ Year US Treasury Bonds (TLT)’.
The market sees the lower end of the US 10-year Treasury yield this year at 3.5%. The 10-year yield has recently been hovering around 3.9%, but it is expected to fall by more than 0.4%p by the end of the year. In a report last month, the US investment research firm Alpine Macro analyzed, “Assuming no recession occurs, the lower end of the 10-year yield is 3.5-3.7%.” If the possibility of a recession increases and the inversion of short-term and long-term Treasury yields fully occurs, long-term bond yields will fall below short-term bonds, and investment returns are expected to increase further.
The Yen Hedge US long-term bond investment strategy, which was often used by ‘bond ants’ in the past, seems to be losing popularity. In the first half of this year, individuals bought a large number of US long-term bond ETFs listed on the Japanese stock market. This is a strategy to invest in US long-term bonds with the yen, which is low in value against the won, and then gain both profits from the rise in bond prices due to interest rate cuts and exchange rate gains from changes in the Bank of Japan’s (BOJ) monetary policy. Then, last month, the Japanese base interest rate was raised to 0.25%, causing the yen to strengthen, and most are currently taking profits. According to the Korea Securities Depository, from August 5 to September 4, domestic investors sold a net $86.04 million (approximately KRW 115 billion) worth of ‘ISHARES 20-Year or More US Treasury Bond Yen Hedge’.
“Big cuts are risky for emerging market investments”
As interest rate cuts are imminent, investment demand is also flowing into emerging countries. When liquidity in the market increases due to interest rate cuts, investment funds flow into emerging countries with high economic growth rates. During this period, emerging countries have more relaxed monetary policies than the United States, making bond investment attractive. The market that is receiving the most attention is India. According to ETF Check on September 4, 562.1 billion won has flowed into 7 domestic ETF products related to India over the past 3 months. The Indian stock market has been on an upward trend since Prime Minister Narendra Modi’s third term was decided in June, and most products are recording double-digit 3-month yields. In addition, bond investment in emerging countries such as Ecuador, Argentina, South Africa, and Egypt is also gaining popularity.
However, experts pointed out that “emerging market investments require caution depending on the extent of the U.S. base rate cut.” Hong Chun-wook, CEO of Prism Investment Consulting, said, “Generally, when interest rates are lowered, the preference for investment in emerging markets increases,” but added, “If the Fed makes a big cut of 0.5%p this time, it means that an economic recession has become a reality, and emerging markets are more affected by the global recession.” Hong continued, “Emerging markets with small domestic demand can fall into a default crisis during an economic recession,” adding, “Investment in emerging markets should be decided after looking at the extent of the Fed’s interest rate cut.”
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Reporter Lee Seul-ah [email protected]
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2024-09-16 05:59:41