November is a good month for both the Korean stock and bond markets. Especially

November is a good month for both the Korean stock and bond markets. Especially bonds.

But is there a room for further interest rates to fall in the future? Hmm

~ With the bond market enjoying an unprecedented boom for a month in November, there are growing calls for the U.S. Fed to cut interest rates in the first half of next year, along with concerns about a drop in the economy next year and expectations of easing the tightening stance due to slowing inflation. Amid growing interest from bond investors betting on falling interest rates, some argue that expectations for a rate cut next year have been excessively reflected in the bond market, which requires caution. It is time for each person to check their bond investment strategy that suits their situation.

Expectations are growing for a drop in interest rates based on slowing inflation as the personal consumption expenditure (PCE) price index in October, announced in the U.S. on the 30th, reached its lowest level since March 2021, with only 3% year-on-year amid keen attention on what remarks will be made in Federal Reserve Chairman Jerome Powell's speech on the 1st local time. The previous day, the Bank of Korea lowered its economic growth forecast for next year to 2.10%, down from 2.20% the previous day, and corporate performance and interest in stocks also seem to be dampened. On the other hand, more and more investors are betting on increased volatility in bonds, especially long-term bonds, following interest rate cuts.

This expectation has already lasted for a month in November, with the "Bloomberg Global Total Bond Index" soaring more than 5% for a month. However, both the Fed and the Bank of Korea are warning of excessive expectations for interest rates to fall soon. The previous day, Bank of Korea Governor Lee Chang-yong also froze the key interest rate at 3.50% for the seventh consecutive time, warning of the risk of maintaining the debt ratio excessively, saying, "The tightening stance (freezing and raising interest rates) could last more than six months."

However, the market has already made interest rate cuts a fait accompli, and the bond market is proactively reflecting this. Goldman Sachs and others set the third quarter of next year as the Fed's rate cut, but UBS expects it to be in the first quarter of next year, and Bill Akman, who has influence on the market as a hedge fund investor, has also made previous hawkish expectations and changed his opinion to cut interest rates in the first quarter of next year.

However, there are also many voices concerned about this view.

Lee Kyung-rok, a researcher at Shinyoung Securities Credit Analysis, said on the 1st, "We believe that the strong advantage of credits until the beginning of the year is valid, but we need to respond to volatility as there are some preemptive profit-taking movements centered on blue-chip ratings that have limited additional strength."

"Essential credit instability factors remain, such as concerns over full-fledged real estate financial loss recognition next year, shrinking lab trusts, increasing issuance of some public institutions due to lack of tax revenue and continuing roles, steady issuance of loans, the arrival of MBS issuance volume and ELS stigma in the first half, and concentration of KEPCO bond maturity in the second half, so temporary and conservative responses after the beginning of the year," he recommended.

Investors' bets on falling interest rates have already been strong since the beginning of this year. ETF products, which added leverage (leverage effect) to long-term bonds in the U.S. for more than 20 years in anticipation of a sharp drop in interest rates, have almost monopolized the top net purchases of individuals in the past year, but they have still lost more than 30% despite the recent one-month rally.

In the case of ACE 30-year government bond active (H) ETF released by Hantoo Management in March, individual net purchases have continued for more than a month, exceeding 300 billion won in net assets. In particular, this product is a monthly dividend product and is gaining popularity by distributing interest generated from bonds in between. Amid the recent increase in the number of people who manage retirement pensions as ETFs, the fact that it is an ETF that can be incorporated up to 100% in the account is also highly interested in investors as it matches the nature of the retirement pension, which requires long-term management.

"No matter how popular bonds are, those who are still interested in stocks do not aggressively jump into the bond market," said the head of the Yeouido Center at a large securities firm. "However, products that have lower expectations for stocks and leverage in anticipation of falling interest rates are volatile, satisfying some of the needs of existing stock investors."