Domestic individual investors continue to invest in American Government Bonds. With American Government Bonds interest rates climbing rapidly, it seems they believe they can profit if the Federal Reserve (Fed) lowers interest rates within the year. However, there are warnings of a financial crisis following the downgrade of the U.S. credit rating.
According to Korea Securities Depository on the 20th, products based on American Government Bonds made it to the list of exchange-traded funds (ETFs) with the largest net inflows for the previous day. ACE Active U.S. 30-Year Government Bonds (H) saw a net inflow of 90.8 billion won. ▲RISE U.S. 30-Year Government Bonds Yen Exposure (Synthetic H) 41.9 billion won ▲KODEX U.S. 30-Year Government Bonds Active (H) 41.8 billion won ▲TIGER U.S. 30-Year Government Bonds Strip Active (Synthetic H) 40.8 billion won were also named among the top ETFs by net inflow. Most of the funds came from individual investors.
The direct investment size in American bonds was also significant. Domestic investors purchased a net of $916.6 million (about 1.28 trillion won) in American bonds this month. Although it's still mid-month, this already exceeds the recent one-year monthly average net purchase size of $772.8 million.
The sharp rise in American Government Bonds interest rates is interpreted as an investment opportunity. The yield on the 10-year American Government Bonds, which serves as a global benchmark for bond interest rates, was 4.175% at the end of last month, but as of 10:50 a.m. today, it reached 4.45%. The yield on the more volatile 30-year American Government Bonds has risen from 4.68% to around 4.9% during the same period.
The impact of Moody's downgrade of the U.S. credit rating from the highest level of 'Aaa' to 'Aa1' caused the yields on the 10-year and 30-year American Government Bonds to exceed 4.5% and 5%, respectively, the previous day. Fortunately, the market quickly absorbed this 'anticipated downgrade,' causing a slight retreat in the rise of interest rates.
Investors in American bonds rely on the Federal Reserve. If the Fed lowers interest rates, bond yields could fall (leading to a rise in bond prices). According to the Chicago Mercantile Exchange (CME) FedWatch Tool, participants in the U.S. federal funds rate (FF) futures market are currently pricing in a 37.2% probability that the Fed will lower interest rates twice by the end of the year. They are also reflecting a 33.4% probability for three or more cuts.
An Jae-kyun, a researcher at MERITZ Securities, remarked, 'Despite short-term anxiety, the upper limit of the 10-year American Government Bonds is expected to remain at 4.5%, and the upper limit of the 30-year bonds at 5%. I believe long-term government bonds are in the undervalued territory.'
However, there are also voices expressing concerns about many challenges. This is due to the flight of investors from dollars and American Government Bonds following the 'tariff war' initiated by the Donald Trump administration. Global investment bank UBS stated, 'While it is difficult to completely replace the dollar's status as a reserve currency, foreign investors are diversifying their investment destinations into alternative currency assets, which particularly burdens the yields on long-term American Government Bonds,' adding, 'This rating downgrade could exacerbate this trend.'
The issue of fiscal soundness in the U.S. is also ongoing. Fiscal concerns are exerting additional pressure on the term premium. This means that the longer the American Government Bonds that domestic investors purchase, particularly those with a maturity of 10 years or more, the less likely the interest rates will drop.
The Committee for a Responsible Federal Budget (CRFB) estimates that if the tax cut proposed by the Republicans passes, fiscal deficits could increase by $3.3 trillion (about 459 trillion won) through the fiscal year 2034, and if temporary provisions are made permanent, the fiscal deficit could grow to $5.2 trillion (about 723 trillion won). During the same period, the government debt as a percentage of the U.S. gross domestic product (GDP) will surge to 129% (on a permanent basis).
Hwang Su-wook, a researcher at MERITZ Securities, advised, 'Primarily, a conservative approach may be necessary until the Federal Open Market Committee (FOMC) meeting in June and secondarily until the U.S. Congress establishes fiscal policy by July 4.'