After the prices of U.S. government bonds plummeted, U.S. President Donald Trump, who had been ramping up high tariffs on trading partners, took a step back. Analysts among investors say that now is a once-in-a-lifetime buying opportunity because such a rapid drop in U.S. bond prices has never occurred before.
In particular, analysts have suggested that the backdrop for the recent plunge in U.S. government bonds is that even Japan, an ally of the United States, has been dumping U.S. government bonds.
In the securities industry, it is analyzed that this extraordinary situation could be a new investment opportunity. DB Securities recently described the current scenario of rising U.S. long-term bond rates as "a once-in-a-lifetime investment opportunity," stating that it is "a precious chance to buy U.S. long-term bonds at a low price and sell them at a much higher price in the future."
Earlier this month, the yield on U.S. 10-year government bonds, which had been around 3.86%, has recently moved within the range of 4.4% to 4.5%. This indicates that the price of U.S. bonds has plummeted. Bond yields and bond prices move inversely.
The price of U.S. government bonds, considered the safest asset in the world, began to fall sharply just after U.S. President Donald Trump announced his stringent tariff policy. Usually, when concerns about an economic downturn grow, funds move to safe assets, but the recent plunge in U.S. government bonds is contrary to the existing flow of funds.
As soon as the tariff policies wielded by the Trump administration turned towards China, speculation arose that China had sold a large amount of U.S. government bonds it held. It is claimed that China is selling U.S. long-term bonds to push up interest rates while simultaneously defending the relative value of the yuan.
Okumura Ataru, chief interest rate strategist at SMBC Nikko Securities, noted in a memo sent to investors that "there is a possibility that China is selling government bonds in retaliation against the U.S.," adding that "this could be an attempt to shock the global financial market to strengthen negotiation power."
During the intense U.S.-China trade conflict in 2023, China sold $240 billion worth of U.S. government bonds after a year and a half. Recently, reports have continued to emerge that even Japan, its ally, has been dumping U.S. government bonds.
Experts analyze that if the cause of the sharp rise in bond yields is the dumping phenomenon exhibited by trading partners during the trade war initiated by the U.S., there is a chance for normalization in the future.
Kim Seong-soo, a researcher at Hanwha Investment & Securities, said, "The U.S.-China trade conflict is a familiar situation, and countries other than China will experience reduced shock levels through tariff exemptions," adding that "with expectations of a decline in interest rates in the future, now is seen as the time to buy long-term bonds."
Some are paying attention to the possibility that this bond dumping occurred during the collateral liquidation process. It is explained that some large investors, such as hedge funds, had invested in long-term government bonds with borrowed money, suffered losses due to recent market instability, and ultimately dumped their bonds held as collateral into the market, causing a sharp rise in yields. This is viewed as a temporary phenomenon and might signal a significant decline in yields in the future, according to the securities industry.
Moon Hong-cheol, a researcher at DB Securities, explained, "The sharp rise in rates caused by collateral liquidation does not last long when considering the speed of recovery," adding that "it is a prelude likely leading to a significant drop in interest rates, so one should hurry to seize (the opportunity to buy long-term bonds)." He also predicted, "As credit risks reach a critical point, the Federal Reserve will eventually provide liquidity support, and long-term interest rates will decline."
In fact, last Friday (the 11th), as the yield on U.S. 10-year bonds exceeded 4.5%, retail investors began to buy long-term government bond products at low prices. Individuals net purchased 1.8 billion won worth of the ‘ACE U.S. 30-Year Treasury Active’ ETF on the 11th, which exceeds four times that of the previous trading day (400 million won). During the last six trading days (from the 4th to the 11th) when the yield on 10-year bonds rebounded, the total net purchase amount by individuals was 5.4 billion won, approximately nine times that compared to the previous six trading days (600 million won).
There are also indications of direct investments in U.S. long-term bonds based on interest rate peak theories. Among the top 16 most purchased stocks by retail investors over the past week was the ‘DIREXION DAILY 20 YEAR PLUS DRX DLY 20+ YR TREAS BULL 3X SPLR’ ETF, which tracks the daily yield of U.S. government bonds with maturities over 20 years and amounted to 115 billion won. During the same period, the ‘ISHARES 0-3 MONTH TREASURY BOND’ ETF, which invests in U.S. short-term bonds with maturities of three months or less, attracted 99.7 billion won.
Some have advised that investing primarily in short-term bonds during this roller-coaster market is safer. Short-term bonds are easier to convert to cash as their maturities are closer, and their price changes due to interest rate fluctuations are smaller. It is explained that it would not be too late to shift to long-term bonds after a confirmed rate cut.
Over the past six months, the performance of short-term bonds has significantly outpaced that of long-term bonds. According to Koscom on the 14th, the revenue of the ‘ACE U.S. Dollar Short-Term Bond Active’ Exchange Traded Fund (ETF), which invests in U.S. short-term bonds (less than one year), was 7.49% over the last six months. The same short-term bond investment product, ‘TIGER U.S. Dollar Short-Term Bond Active’ ETF, recorded a revenue of 7.43%.
In contrast, the revenue for the ‘ACE U.S. 30-Year Government Bonds Yen Exposure Active (H)’ and the ‘RISE U.S. 30-Year Government Bonds Active’ ETFs, which invest in U.S. long-term bonds during the same period, were only 0.64% and negative (-3.24%, respectively.
Lee Woong-chan, a researcher at iM Securities, stated, "Tariffs act as pressures of stagflation, so the Federal Reserve will likely move only after confirming the impact of tariffs on inflation," adding that "the recovery of the upward trend will ultimately begin with a reduction in tariff policies and interest rate cuts by the U.S. Federal Reserve. We must closely monitor the negotiation process from April to June."