“Interest Rate Cuts on the Horizon”: The Rise of Debt Investment and Fund Flows

As expectations grow for an interest rate cut by the U.S. Federal Reserve next month

With growing expectations of an interest rate cut by the Federal Reserve next month, we are witnessing significant shifts in financial flows. Bond funds are seeing increased investment, while debt-driven investments are on the rise. This article examines how the anticipated rate cut is affecting various financial markets, including domestic and international investments.

As expectations grow for an interest rate cut by the U.S. Federal Reserve next month, significant changes are occurring in the financial markets. According to data from financial information provider FN Guide, the amount of assets in domestic bond funds reached 60.12 trillion won as of the 14th of this month. This represents an increase of 807.5 billion won over the past week and 206.6 billion won in just one day.

In contrast, domestic equity funds saw a much smaller increase of 521.3 billion won over the past week, with 65.9 billion won leaving the funds compared to the 13th of August.

The anticipation of a potential rate cut in Korea, following the expected U.S. rate cut, is driving capital into bond funds. The consumer price index (CPI) for July, released on August 14, matched expectations at around 2%, increasing the likelihood of a September rate cut by the Federal Reserve.

This has led to increased expectations that the Bank of Korea will also lean towards a dovish stance at its upcoming Monetary Policy Committee meeting on August 22. Kiwoom Securities’ analyst Kim Yumi noted, "With the upcoming FOMC minutes and Jackson Hole meeting in the U.S., and the Bank of Korea's interest rate decision in Korea, the financial markets are generally expecting a dovish tone and higher chances of rate cuts later this year."

Daishin Securities’ analyst Lee Kyung-min emphasized the importance of any shifts in the Bank of Korea’s monetary policy stance in August. He pointed out that factors such as prolonged high interest rates causing domestic stagnation, concerns over real estate project financing, and rising household debt are potential risk factors for the domestic market that could influence investor sentiment.

In this context, stock markets are rebounding quickly. From August 8 to 14, the KOSPI and KOSDAQ indices rose by 2.96% and 3.78%, respectively. Following the dramatic decline in stock credit transactions on August 5, there has been a slight increase in these transactions. Stock credit transactions involve investors borrowing money from brokerage firms to purchase stocks, with interest rate cuts typically seen as a positive factor for stock prices.

Statistics from the Financial Investment Association show that the balance of credit transactions increased from 17.13 trillion won on August 8 to 17.55 trillion won on August 14. During the same period, investor deposits fell by 1.98 trillion won, and the amount of money market funds (MMFs) decreased by 6.22 trillion won.

Additionally, domestic investors were net buyers of U.S. stocks, with net purchases amounting to $613.27 million (approximately 8.32 trillion won) during this period. The top net purchase was Tesla, with net purchases totaling $91.02 million (about 1.24 trillion won).

The anticipated interest rate cut by the Federal Reserve is causing notable shifts in financial flows, with increased investments in bond funds and a rise in debt-driven investments. As domestic and international investors adjust their portfolios in response to these expectations, the financial markets are experiencing significant changes. Monitoring these trends will be crucial for understanding the broader impacts on investment strategies and market dynamics.