South Korean bond funds have been outperforming all other capital instrument tools amid frenzied bond rally from bets on interest rates going lower due to deteriorated economic conditions.

According to data released by Korea Financial Investment Association (KOFIA), the net asset value of bond funds increased by 3.65 trillion won ($3.08 billion) last month from the previous month, whereas that of equity funds shrank 5.3 trillion won on month as investors are increasingly shunning risky assets.

Local market tracker FnGuide found on Sunday that yield for KOSEF 10-year government bond exchange-traded funds (ETFs) reached 11.15 percent over the past year. The country’s only public fund tracking 10-year Treasury NH-Amundi Allset Treasury Bond 10Year Index generated an annual yield of 10.59 percent over the same period.

Bond funds usually have low yield of 2 to 4 percent per annum as bonds show low volatility as safe assets. But the growing market expectations on policy rate cuts has been dragging down the 10-year government bond yield from 2.65 percent in June 2018 to 1.9 percent at the end of the year. As of last Friday, it was down 2.2 basis points from the previous day to 1.591 percent.

Market analysts expect the trend would continue for a while due to rising uncertainties caused by the escalating trade conflicts between the United States and China, as well as the Korean central bank governor’s latest dovish remarks hinting at a rate cut. BOK governor Lee Ju-yeol said last week that there is a need to take “timely action” due to the changes in economic conditions during an event celebrating the 69th anniversary of the central bank, signaling a possible rate move.

By Kim Je-lim and Choi Mira

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