Why Korean Retail Investors Are Buying Bonds With KOSPI Near 7,000, and Why I Kept My Plan
In September, individual investors in Korea bought a net ₩4.0225 trillion of domestic bonds, the largest monthly amount this year (in Korean), according to Korean financial press. This happened while the KOSPI was close to 7,000. I thought about doing the same thing: holding money in bonds or deposits and waiting for a drop. In the end I did not change how I invest. This post is about why, and about what rising rates look like among people I know.
A Month of Rising Yields and Big Swings
Korea had a long Chuseok holiday in late September. While Korean markets were closed, the US 10-year Treasury yield rose to its highest level since 2007. On September 28, the first trading day after the holiday, the KOSPI fell 2.70% (in Korean), and Samsung Electronics and SK Hynix each dropped more than 5%. That day, the US 10-year yield went above 5.2% (in Korean). On October 1, US time, it touched 5.344% early in the session, the highest since 2002, before falling back later in the day. On that same day, the 30-year yield also reached its highest level in 24 years.
But the market did not only go down. On the trading day before October 2, the KOSPI fell more than 1% in the morning, then turned around and closed at 6,971.35, up 1.95% (in Korean). The KOSDAQ jumped 4.48%. Local reports said buyers came in for chip stocks after Micron’s earnings and news that Korea’s September chip exports were the highest on record. So the index is close to 7,000, but it is swinging sharply up and down.
The explanation in the local press is simple. As government bond yields rise, the interest on bonds becomes more attractive, and as stocks swing more, some money moves into bonds. Bank deposits are part of the same story. Savings accounts paying more than 4% interest have been appearing one after another, and some people are moving money into them (in Korean) because they think a bank account is better than stocks right now. The government is also acting on the bond side. It plans to use excess tax revenue to cut October government bond issuance by several trillion won (in Korean), and to run emergency buybacks if rates jump.
The Plan I Thought About
I did think about it. There is a common view that when rates go up, there is less room for stocks to go up. That made me consider a different approach: keep money in bonds or deposits for now, and then buy more when prices fall a lot from the peak.
I had even set numbers for when to start extra buying:
| Index | Extra buying starts at |
|---|---|
| Nasdaq | 20% below the peak |
| S&P 500 | 10% below the peak |
But moving money into bonds to wait for that drop is a bet that the drop will come. Nobody knows where prices will go. Not me, and not the people saying rates will hold stocks back. So I decided to keep doing what I was already doing: regular installment buying, the same way as before.
Buying a Treasury Was Not the Hard Part
Bonds are not new to me. When Toss Securities launched its overseas bond service (in Korean), I bought US Treasuries. It was easy. It felt like trading a stock. So in my case, the barrier to moving money into bonds was never the app or the process. The hard part is the decision, and that decision depends on guessing what stocks will do next.
Friends With Variable-Rate Mortgages
Rising rates show up in housing too. Local reports said the average bank mortgage rate in August was 4.66% (in Korean), up 0.18 percentage points in one month and the highest in three years and nine months. With global rates jumping, the interest burden is expected to grow further.
If you are used to a mortgage rate that stays fixed for the life of the loan, this part may look strange. Most of my friends who bought homes took variable-rate mortgages. They tell me what they pay on their loans has gone up. Still, from what I hear, it has not risen to a level where I would worry about them yet.
Where This Leaves Me
I understand the ₩4 trillion. With Treasury yields above 5% and Korean deposits paying over 4%, holding bonds or cash is a reasonable choice for many people. I considered it seriously myself. But for me, moving to bonds would really have been a bet on timing, not a safe choice. I don’t know when stocks will fall or how far, so I kept the plan that does not need me to know. This is my own choice as an individual investor, not advice.