Korean retail investors’ holdings of government bonds top $7.48 bn

Retail investors in South Korea are increasingly entering the government bond market, once thought to be the domain of high-net-worth individuals, with the emergence of sovereign bonds where retail investors hold 25 percent of the total issuance. Individual investments in government bonds topped 10 trillion won ($7.48 billion) in 2023, reflecting an unprecedented boom in government bond investments.

According to the financial investment industry on Sunday, net purchases of government bonds by individuals in 2023 amounted to 8.95 trillion won as of Friday. Individuals’ holdings of government bonds surged to 14.38 trillion won on Wednesday, up from 4.21 trillion won at the end of last year, a 16-times increase over a two-year period. The balance of government bonds held by individuals was 914.5 billion won in 2021, when the stock market was doing well.

Individuals’ investment in government bonds, which began blooming in the second half of last year, is concentrated in a few stocks. “Low-coupon rate government bonds such as Korea Treasury Bond (KTB) 19-6 have tax-saving benefits,” according to Yoo Hyun-sook, head of the WM division at NH Investment & Securities Co. “It is still a viable means of investment.”

Retail investors with small amounts of funds are increasingly joining wealthy individuals in buying Treasury Bills 19-6, 20-2, and 20-8. On Wednesday, Treasury Bill 19-6 was the most popular bond held by individuals with a balance of 2.76 trillion won and the five most popular treasury bills held by retail investors have a combined balance of nearly 9 trillion won. This means the five bills account for 62 percent of all government bonds held by individuals.

Treasury Bill 20-2 has topped the individuals’ net purchase list for six consecutive months from March through August. The current balance held by individuals is 2.56 trillion won, an astonishing 14,900 percent increase from 17 billion at the end of last year. Treasury Bill 20-2 has a coupon rate of 1.5 percent, which is slightly higher than that of 19-6, but has a much longer maturity, allowing for more capital gains with even the slightest change in interest rates. This is because long-term bond prices are more sensitive to interest rate movements than short-term bonds.

“High-net-worth individuals prefer to invest in government bonds because of the three benefits they get - tax savings, stability, and liquidity,” said Kim Hee-kyung, head of the Cheongdam PB Center at KB Securities Co. “Government-backed bonds are stable and have tax-saving benefits as capital gains are tax-free, and their high liquidity also allows them to sell the bonds for billions of won in the market.”

Although there is a boom in investment in government bonds, it is not easy to realize profits as interest rates remain flat. The price of Treasury Bill 19-6, which rose to 7,420 won in February, fell to 7,050 won last week.

When ignoring interest and simply calculating the arbitrage yield, the figure is minus 4.98 percent, meaning an investment of 10 million won incurs a loss of around 500,000 won.

The problem is that there are many forecasts about interest rates in the U.S. and Korea not going down for a while. Particularly in the U.S., there is even talk of further interest rate hikes to control rebounding inflation and curb overheated employment. Bond rates and prices move in opposite directions, so long-term Treasury investors will lose even further if there are more rate hikes.

Fears that high interest rates could persist beyond 2024 have led some brokerage firms to recommend short-term instead of long-term investments.

Long-term bonds can guarantee principal if they are held to maturity, but the money is tied up until the 20- to 30-year maturity. On the other hand, three- and five-year government bonds guarantee principal and even interest if held to maturity even if interest rates rise.

“It is a much better bet to buy bonds than in the first half of the year, when expectations for rate cuts were reflected too quickly,” Samsung Securities Co. analyst Kim Ji-man said. “There should be a seasonal decline in bond purchases toward the end of the year, but individual bond buying will not slow down until at least October.”