The number of domestic investors exiting U.S. long-term bond exchange-traded funds (ETFs) is increasing. This is because expectations have gained momentum that the Central Bank’s interest rate cuts may progress more slowly than anticipated, leading to bond yields that barely seem to decline.
According to the Korea Securities Depository on the 18th, domestic investors recently net sold $105.6 million (approximately 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 follows the daily changes in U.S. long-term bond yields at three times the rate. During the same period, domestic investors also net sold $38.09 million (approximately 55 billion won) of 'TLT (iShares 20+ Year Treasury Bond ETF),' which simply tracks the daily rise in long-term bond yields.
An ETF investing in U.S. government bonds with Japanese yen, '2621 (BRJ iShares 20+ Year US Treasury Bond JPY H ETF),' also showed a sales dominance of $30.1 million (approximately 43 billion won) from domestic investors over the past month.
The main reason investors are selling U.S. long-term bond ETFs is that bond yields have sharply risen since hitting a low point in September of this year and show little sign of falling. This means that bond prices are not increasing. The yield on the U.S. government bonds benchmark of 10-year notes fell to 3.599% last September, but has recently fluctuated above 4.4%.
Many market participants believe that the Central Bank will find it difficult to lower rates quickly, which is considered a reason for the stagnation in bond prices. The rationale for the slowdown in rate cuts can be attributed to two main factors. First, there are concerns that the tariff policies of the second Trump administration could stimulate import prices, leading to potential rising inflation. Additionally, U.S. consumer spending continues to thrive. U.S. retail sales in November increased by 0.7% compared to the previous month, exceeding the market expectation of 0.5%.
At the Federal Open Market Committee (FOMC) meeting in December, the prevailing expectation is that the Central Bank will cut rates by an additional 0.25 percentage points. However, global investment banks (IBs) including Goldman Sachs anticipate that the Central Bank will emphasize caution in its statement on the 18th (local time), mentioning a potential adjustment in the pace of rate cuts in 2025 or that it will "rely on data."
According to the Chicago Mercantile Exchange (CME) FedWatch Tool, participants in the U.S. futures market see a 32.2% probability that the Central Bank will lower rates twice by the end of 2025, the highest figure. The likelihood of cutting rates three times or more decreased to 29.1%, down over 10 percentage points in a week. During the same period, the shares for a one-time cut (28%) and no cut (10.2%) increased.
Apart from U.S. rates, there are also aspects that have boosted the allure of Korean government bonds. This is due to the confirmed abolition of the financial investment income tax (financial investment tax). If the tax had been implemented as originally planned starting January 2025, a maximum tax of 27.5% would have been levied on profits from bond trades exceeding 2.5 million won per year. With the National Assembly deciding to abolish the financial investment tax, Korean government bonds have avoided the previous tax burden.
In particular, there is a strong demand for bonds with low coupon rates (nominal interest rates). Over the past week, individuals have net purchased nearly 400 billion won of a government bond that has a coupon rate of 1.125%.
Kim Ji-man, a researcher at Samsung Securities, noted, "Government bond yields are currently decreasing to around 2%, reducing their investment attractiveness." However, he added, "There are still bonds with coupon rates in the mid-1% range, and with the financial investment tax abolished, demand for individuals' bonds is likely to continue for the time being."