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Investments tied to bonds in Germany come due

Sept 17,2019
The fate of investors in a controversial investment class will be determined this week as its maturity is due Thursday.

The investment in question are derivative-linked funds (DLFs) tracking the interest rates of 10-year German treasury bonds sold by Woori Bank. All of the investments are expected to be losers due to lower than expected interest rates.

Woori Bank raised 123.6 billion won ($104.5 million) in investments in the DLFs between March and May.

The exact loss depends on German treasuries’ interest rate on the date of maturity, but analysts estimate that investors could lose 40 percent of their original investment based on recent trends of the German bonds.

Most of the investments were structured to incur losses when the interest rate on German government bonds dipped below minus 0.2 percent. If the rate fell to the minus 0.7 percent level, the investors would lose all their money. If the rate was within or above the minus 0.2 percent range, the funds ensured a 4 to 5 percent return.

The interest rate stood at minus 0.46 percent as of Monday. The current level could provide a sigh of relief since it was lower earlier this month and late last month.

The interest rate for a 10-year German treasury bond was minus 0.622 percent as of Sept. 6. On Aug. 28, the rate hit minus 0.714 percent.

Prices of German treasury bonds surged and the interest rate plummeted earlier this year as the global economy was thrown into a slowdown in trade triggered by the U.S.-China trade war and Brexit.

Other derivative-linked products such as one that tracks the seven-year British pound constant maturity swap (CMS) rate and another that tracks the five-year U.S. dollar CMS rate are expected to generate losses.

The Financial Supervisory Service (FSS) estimated last month that combined losses could amount to 455.8 billion won if the assets’ interest rates stayed at the current level.

Meanwhile, the FSS will launch a new round of investigation into Woori Bank and KEB Hana Bank to look into the possibility of alleged negligence after an initial probe conducted last month.

The investigation will run through October, according to multiple media outlets. The financial watchdog intends to see if the banks violated internal guidelines or laws in selling the high-risk investment.

BY PARK EUN-JEE [park.eunjee@joongang.co.kr]


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