Investors Flocking to Safe Assets

Bond yields are falling rapidly as investors are flocking to safe assets. 

Bond yields are falling rapidly as investors are flocking to safe assets with the spread of COVID-19 raising the possibility of a global economic recession.

The three-year government bond yield closed at 1.078 percent on March 6, down 2.6 basis points from a week ago, after dropping to 1.01 percent last week. Experts point out that a zero yield is just a matter of time in that a serious impact on the real economy attributable to the coronavirus is inevitable.

The Bank of Korea is likely to lower the key rate by 25 basis points next month. This is why the three-year government bond yield has remained below the key rate, 1.25 percent, since Feb. 20. In addition, it is said that the central bank will lower the key rate to 0.75 percent in May or the second half and then the bond yield will reach 0.8 percent or so to reflect the adjustment.

The central banks of the United States, Australia, Canada and Hong Kong already lowered their benchmark rates by 25 basis points or 50 basis points. The Fed is forecast to cut rates by additional 50 basis points in the first half of this year and the 10-year Treasury yield hit 0.66 percent on March 6.

Experts’ consensus is that an interest rate cut by the Bank of Korea is unlikely to result in a foreign capital outflow. “Many other central banks are doing so these days and the CRS spread is currently attractive enough for foreign investors,” one of them explained. The current yearly spread is approximately 50 basis points, which means a foreign investor investing in a government bond for one year can gain 0.5 percentage point in addition to a bond yield of 1.05 percent. Foreign investors’ net bond purchase in South Korea totaled 916.4 billion won in the first week of this month.

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