Investors Flock to Domestic Bond Funds

Amidst speculations of a base rate reduction by the Bank of Korea, domestic investors are increasingly turning to local bond funds. The anticipation is fueled by the upcoming Monetary Policy Committee meeting and South Korea's inclusion in the World Government Bond Index (WGBI) this November. Despite a decrease in expected U.S. base rate cuts and potential rate hikes, the domestic bond market sees a significant influx of investments.

ETF and Fund Balances Surge

Recent data from FnGuide highlights a notable increase in domestic bond-type ETF balances, reaching 47.56 trillion won, a jump of nearly 1.16 trillion won in just eight trading days. In contrast, domestic equity-type funds saw a modest increase, and overseas equity-type ETFs underperformed significantly.

Interest Rates and Market Uncertainty

The bond market's attractiveness is partly due to the inverse relationship between bond prices and interest rates. With the Bank of Korea's rate cuts, bond yields have dropped, offering dual returns from interest income and capital gains. However, the market faces uncertainty with the fluctuating won-dollar exchange rate and the impact of U.S. economic policies under President-elect Donald Trump.

Expert Warnings and Future Outlook

Experts caution against concentrated investments in the bond market, citing potential losses similar to those experienced by long-term U.S. Treasury funds. The Bank of Korea faces a challenging decision in stabilizing the won-dollar exchange rate, which has already surpassed the 1,450 won mark, complicating the Monetary Policy Committee's upcoming decisions.