The number of domestic investors withdrawing from U.S. long-term bond exchange-traded funds (ETFs) is increasing. This is due to the expectation that the Central Bank’s rate cut could be slower than anticipated.
According to the Korea Securities Depository on the 18th, domestic investors recently net sold $100.56 million (about 145 billion won) of 'TMF (Direxion Daily 20+ Year Treasury Bull 3X Shares)' over the past month (Nov. 18 to Dec. 17). TMF is an ETF that tracks the daily rise in U.S. long-term bond rates three times. During the same period, domestic investors also net sold $38.09 million (about 55 billion won) of 'TLT (iShares 20+ Year Treasury Bond ETF)', which follows the daily rise in long-term bond rates directly.
The ETF '2621 (BRJ iShares 20+ Year US Treasury Bond JPY H ETF)', which invests in U.S. government bonds using Japanese yen, also showed a sell-off of $30.1 million (about 43 billion won) by domestic investors over the past month. This ETF also lost its position as the most held Japanese stock by domestic investors to the Nikkei 225 index multiplied-inverse ETF.
The biggest reason investors are selling U.S. long-term bond ETFs is that bond rates have been rising again since hitting a low in September and are not dropping easily. This means bond prices are not rising. The U.S. 10-year government bond rate, which serves as a benchmark for global bond rates, dropped to 3.599% last September, but recently fluctuated above 4.4%.
Market participants largely believe that the Central Bank will find it difficult to lower rates quickly, which is cited as a background for the stagnation in bond prices. There are two main reasons for the argument against a rate cut. First, there are concerns that the tariff policies of the second Trump administration could stimulate import prices and inflation may rise again. U.S. consumer spending is also continuing to be strong. Retail sales in the U.S. for November rose by 0.7% compared to the previous month, surpassing market expectations of 0.5%.
In the Federal Open Market Committee (FOMC) regular meeting taking place this week, forecasts suggest that the Central Bank will lower rates by an additional 0.25 percentage points. However, global investment banks, including Goldman Sachs, expect the Central Bank to mention adjustments to the pace of rate cuts for 2025 in its statement on the 19th (local time) or emphasize a cautious stance of 'relying on the data.'
According to the Chicago Mercantile Exchange (CME) FedWatch Tool, U.S. futures market participants see a 32.2% probability that the Central Bank will cut rates twice by the end of 2025 after this FOMC meeting. This is the highest figure. The probability of cutting rates three times or more is 29.1%, which has decreased by more than 10 percentage points in a week. The proportions for a single rate cut (28%) and no rate cut (10.2%) have increased during the same period.
Separately from U.S. rates, the attractiveness of Korean government bonds has also increased, thanks to the confirmation of the abolishment of the financial investment income tax (FII tax). If the FII tax had been implemented as originally scheduled from January 2025, a maximum tax of 27.5% would have been imposed on bond trading profits exceeding 2.5 million won annually. With the decision to abolish the FII tax by the National Assembly, Korean government bonds are now free from the previous tax burdens.
In particular, demand is shifting toward bonds with low coupon rates. Over the past week, individuals have net purchased nearly 400 billion won of a government bond with a coupon rate of 1.125%.
Kim Ji-man, a researcher at Samsung Securities, noted, 'While government bond rates are declining to around 2%, the investment attractiveness is decreasing, there are still bonds with coupon rates in the mid-1% range, and with the FII tax abolished, individual demand for bonds is likely to continue for the time being.'