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Preference for Risk-free Assets Pushes up Bond Prices
Stock Market Volatility Growing
Preference for Risk-free Assets Pushes up Bond Prices
  • By Yoon Young-sil
  • May 20, 2019, 09:55
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Bond prices are rising amid growing stock market volatility.

Bond prices are rising as stock market volatility is growing due to the heightening trade tensions between the United States and China. Interest rates are on the decline due to a rapid increase in demand for bonds and the interest rates of some treasury bonds are hitting the yearly low every day.

The 10-year government bond yield rate closed at 1.670 percent last week, hitting the lowest point of the year, according to the Korea Financial Investment Association on May 19. The figure went down from the previous low of 1.675 percent on May 16 just in a day. In particular, it fell short of the 1.75 percent base rate set be the Bank of Korea (BOK). The 3-year treasury bond yield, the indicator of long-term monetary market rates, was oddly lower than the base rate of the central bank. The 1-year treasury bond yield also closed at 1.707 percent last week, remaining at a yearly-low.

Bond yield rates have decreased owing to the burgeoning demand for bonds as there are growing concerns over the economic slowdown and growing uncertainty in the stock markets at home and abroad. Approximately 5.60 trillion won (US$4.68 billion) of money flowed into domestic bonds alone in the public offering fund market as well. The interest rate of corporate bonds and bank bonds dropped compared to the past, but they were sold at a faster pace once they were issued. In addition, foreign investors have recently been net purchasing 3-year and 10-year bond futures in the futures market for four weeks in a row.

Some say that the demand shows a growth even with a lower yield rate because the market has great expectations that the BOK will lower the standard interest rate. Bonds have an inverse relationship to interest rates – when interest rates rise bond prices fall, and vice-versa. It means that the current bond prices, which have a clear fall in interest rates on bonds to such an extent that the interest rate on some bonds falls below the benchmark interest rate, are much higher than those in the past. In a nutshell, investors can make a profit when bond prices go up and the base rate is lower than the market interest. This is why the market strongly bet on the BOK lowering the base rate.

Bond-type fund operators are having more difficulties in making new investments because of higher interest in bonds. Bond-type funds are required to have at least 60 percent of proportion of bonds. However, there is lack of bonds to buy in the market, though money flows into funds. An official from an asset management firm said, “Since bond prices have increased now, there are not many bonds to purchase unlike the past. If bond prices go up, we can make a profit by selling the bonds we own. But, we can have difficulty in managing the rate of return if the base rate does not go down in the future.”

As the corporate bond market continues to boom, a considerable number of companies, which had poor business performance, are issuing corporate bonds. Notably, more and more individual investors have been participating in the corporate bond market due to the recent bearish stock market. They are having a greater proportion of investment in firms with poor performance. However, there is growing concern that it can lead to a bad investment, though individual investors are making more investment.

Experts expect that investors will continue to have high interest in bonds because there are still concerns over the economic doldrums as the trade dispute between the United States and China will be drawn out. Furthermore, the monetary policy at home and abroad, which will affect the bond market, attract attention. The United States Federal Open Market Committee (FOMC) minutes to be announced on next week and the Monetary Policy Board meeting to be held at the end of this month are expected to become market variables.