Investors Losing Interest in Bond Funds
Investors are losing interest in South Korean bond-type funds, which have drawn until recently a large amount of capital amid growing uncertainties in the global financial market and concerns about global economic slowdown.
The net outflow of capital from 274 domestic bond-type funds came to 608.10 billion won (US$507 million) over the past month as of Sept. 26, according to Seoul-based financial market tracker FnGuide on Sept. 29. The bond-type funds attracted about 10 trillion won (US$8.34 billion) from the beginning of the year, but they seem to be losing popularity.
Many experts attributed the trend to the decline in earnings rates. In fact, the average rate of return of South Korean bond funds over the last month stood at -0.21 percent. An official from an asset management firm said, “The earnings rate of domestic bond funds had gradually dropped from the beginning of this month and recently went negative. This was because some investors who made a profit in the bond market which had been bullish realized the profit and others withdrew funds because of the sluggish returns.”
The price of bonds moves opposite the interest rate. If the interest rate goes up, bond prices go down. The interest rate of bonds which had fallen until August showed signs of rally in September and the rate of returns on bond funds also brought to a standstill. The interest rate of South Korean three-year treasury bonds slid 14.1 basis points in August but the figure rose 6.8 basis points from Sept. 1 to 27, according to data from Korea Financial Investment Association.
The corporate bond market is also sluggish. The interest rate of non-guaranteed three-year corporate AA- rated bonds increased from 1.740 percent on Sept. 2 to 1.806 percent on Sept. 27. The credit spread, which can measure the corporate bond market, was also some 0.4 percentage point earlier this year but it has recently grown to 0.5 percentage point. A credit spread is the difference in interest rates between treasury bonds and corporate bonds. If the credit spread goes up, the demand of corporate bonds goes down.
The asset management industry expects that the investors’ interest in bond-type funds will pick up in the near future. This is because the Monetary Policy Committee of the Bank of Korea is highly likely to lower the benchmark interest rate in October. An official from an asset management firm said, “Concerns over the economic downturn will not easily fade away even the BOK lowers the benchmark interest rate next month. Accordingly, there is a high chance that the central bank will additionally lower the interest rate next year. Capital which bets on the bullish bond market will flow into funds again.”
However, many experts are opposed to the opinion. A head of bond management unit at an asset management company said, “Expectations for lower interest rates on bonds is decreasing even the benchmark interest rate is lowered. Bond prices will not drop but it is difficult to expect returns like July and August. Koo Hae-young, an analyst from Mirae Asset Daewoo Co., said, “The BOK is expected to lower the benchmark interest rate in October, but we should be prepared for the possibility of the BOK changing its stance to relatively conservative after that. There are also some supply factors, including the rise in issuance of government bonds, next year so investors will not be so aggressive in making an investment.”