Rate Rises Sap Bond Funds

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Rate Rises Sap Bond Funds

Returns of mutual funds that invest in bonds have recently deteriorated, a fund-research company said Thursday, because interest rates have jumped, lowering market prices of bonds, which move in inverse relation to interest rates.

According to Korea Fund Research, bond funds in the local market recorded negative return rates on average for the last month.

The long-term funds that invest in government bonds chalked up a -0.19 percent return rate on average, and the long-term funds that invest in corporate bonds posted a -0.17 percent return.

The mutual fund research services firm also said the returns of long-term funds were generally lower than those of short-term funds.

The deterioration of fund returns resulted from the recent bond interest hikes. The Korean won has weakened against the U.S. dollar over the last month, pulling up prices throughout the economy. Accordingly, bond interest rates, which move in accordance with inflation rates, have risen.

After bottoming out at 5 percent on Feb.13, the interest rate on the benchmark three-year government bond has moved upward and reached 6.7 percent on Wednesday. The rate has jumped 1.1 percentage points in the last two weeks, as the won has sharply declined against the dollar, in step with the weakening Japanese yen.

Returns of long-term bond funds have been battered by bond price declines following the interest rate hikes.

On the other hand, returns of most money market funds have been little affected, according to the fund research services provider. The reason for that is that, while return rates of bond funds are calculated based on market prices of bonds, under Korean law money market fund returns are decided based on fixed book values of the short-term debt securities in which the mutual funds invest, instead of the market prices of the instruments.

"Investors had better put their money into short-term funds such as money market funds, when interest rates are fluctuating," said Park Sung-won, an official at Hyundai Investment Trust Management Co. "But investors should be cautious because not all money market funds are safe."




by Chung Jae-hong

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