Bond investors take a hit

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Bond investors take a hit

Investors who poured money into bond funds are dealing with a decline in returns during the past month.

According to Zeroin, a fund evaluation company, local bond funds lost 4.75 percent on average in May as interest rates of government bonds have been rising in major countries. If yields rise, bond prices drop and so do profits for fund investors.

“As for local bond funds, the price of bonds has dropped and interest isn’t that high,” said Jang Chun-ha, a researcher at Woori Investment and Securities. “Investors should recollect their money by withdrawing their investment.”

The surge in interest rates on bonds was triggered by worries that U.S. Federal Reserve might begin to pull back from its quantitative easing by purchasing bonds if the American economy continues to improve.

That possibility was raised last month by Fed Chairman Ben Bernanke. Bank of Korea Gov. Kim Choong-soo also warned last week about risks that could arise when the United States ends its expansionary monetary measures.

As of Friday, the yield for a 10-year U.S. Treasury bond increased 0.5 percentage point to 2.13 percent compared to a month ago, while the yield for Japanese bonds increased 0.3 percentage point to 0.87 percent.

Goldman Sachs predicted recently that Japan’s 10-year yields would reach 1 percent in the latter half of this year and up to 1.1 percent in the second quarter of 2014. The yield for a 10-year Treasury bond in Korea also surged 0.4 percentage point over the same period.

With the rise in bond yields, the profit rate of funds invested in Treasuries has been disappointing. As of Friday, the profit rate of bond funds over the past week was minus 0.27 percent, while that of overseas funds was minus 0.71 percent.

Experts note that investors should be cautious in betting on Treasuries overseas, particularly those of major developed countries, adding that bond funds in emerging countries like Mexico and Indonesia might be an alternative.

By Hong Sang-ji, Lee Eun-joo []
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