Fluctuations in the Bond Market

The bond market is staggering as the bond rate skyrocketed (with bond prices abruptly dropping) after the call rate froze on January 13.

Due to the increase in the bond rate, a vicious circle has taken shape as bond prices further decreased owing to institutional investors hurrying to dispose of bonds. Consequently, the returns of bond-type funds have greatly decreased.

According to the Korea Securities Dealers Association and the Asset Management Association of Korea on January 21 the rate of the standard three-year treasury agency bond increased to 3.94 percent, the highest since last August 11 (4.04 percent).

The standard three-year government bond rate is the standard index that affects other bond rates, and if this rate increases the price of bonds decreases.

Rapid Increase in Repurchasing Funds Anxiously Anticipated-

As the bond rate increases, private investors are collecting their investments. Experts are concerned that if bond rates continuously rise, side effects such as increases in the number of bond for sale and fund repurchasing (funds withdrawal) will grow.

The amount of trust money deposited in bond type funds has decreased by 1.3 percent since December 31 (75 trillion, 885.9 billion won) to 74 trillion 904.8 billion won on January 20.

Gwon Gyoung-eop, the bond management director of Daehan Investment Management Company Limited, said, “Though there have been a few requests for repurchasing due to low returns on a portion of the funds, the demand for repurchasing is scarce.”

It was anticipated that the movement of the bond market will vary according to the direction of the call rate and the time of economic recovery.

Why is the Bond Rate Increasing?-

Lee Heung-geun, the bond market conditions team manager of the Korea Securities Dealers Association, selected the following as causes of the recent increase in the bond rate; rising expectations of economic recovery, the possibility of a long term freeze of the call rate, and an increase in the bond supply.

A high-ranking officer of the Bank of Korea said, “As various economic indexes show signs of recovery, anticipation that the economy will not deteriorate is growing.”

He added, “Many believe that the bond rate has hit the bottom.” This means that there will be no more artificial economic stimuli such as a decrease in the call rate in the near future.

The forecast that the bond supply will increase is a factor increasing the bond rate. The Ministry of Finance and Economy and the Bank of Korea recently announced that they will greatly increase the bidding scale for issued treasury agency bonds and currency control bonds.

KIS Pricing and Woori Securities, companies which grade company bonds, forecasted this year’s treasury agency bond issuance to increase by 10.1 percent from last year (68 trillion, 430 billion won) to 75 trillion 330 billion won.

Kyung-Joon Chung legman@donga.com news91@donga.com