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Will the Interest Rate Continue to Rise?

Posted February. 01, 2005 22:43,   


Since the beginning of this year, the interest rate of long-term bonds has steadily increased (meaning the decrease of bond price).

An index rate, government bond rate with three-year maturities has increased from 3.28 percent at the end of last year to 4.06 percent on January 31, 2005. That is a 0.8 percent increase within a month.

It was the first time the interest rate of the three-year maturity government bonds has been over four percent since August 11, 2004 (4.04 percent).

As the interest rate increases, the profit rate of bond funds has dropped to negative, and the interest rate of loans is increasing.

Why is the interest rate increasing? Primarily because supply and demand of bonds are not equal in the market.

The government has increased the amount of government bonds from three trillion won in the fourth quarter of 2004 to 6.7 trillion won in the January of 2005. Moreover, the government has announced on January 28 that it will publish more treasury bills worth five trillion won. As a result, the amount of bonds in the market has greatly increased.

Also, the recent depreciation of the won-U.S. dollar exchange rate (increase of won value) has worsened the situation.

The forecast that the government is planning to increase the amount of government bonds to raise the required money to intervene in the exchange market has caused the investments to decline.

Lim Gang-taek, head of the bond management department of Kookmin Bank said, “The increased expectation of business recovery is a partial reason for the increased interest rate. The judgment whether interest has actually increased or decreased can only be made at the end of the first quarter of the year.”

Aftermath of the increased interest rate-

According to Zeroin, a fund evaluation firm, clients who bought bond funds at the beginning of the year have lost 0.63 percent of their money on January 31. The three-month profit rate is 0.04 percent, which is the principal value level. If the interest rate continues to rise, the three-month profit rate can also drop below 0 percent.

As the profit rate dropped, the remainder of bond funds decreased by 2.05 trillion won within a month in January.

On the other hand, the profit rate of stock funds lead to 4.66 percent gains in one month and 11.29 percent in three months.

Since the 70 percent of bank loans immediately reflects the market interest rate, the interest rate of bank loans is also increasing.

The interest rate of Kookmin Bank’s certificate of deposit with mortgage has increased from an annual 5.07 percent to 5.24 percent. However, the banks are planning to decide whether to increase the deposit rate after watching the call rate in February.

Kang-Woon Lee kwoon90@donga.com