[Interview] Lee Yun-hee, Head of Fixed Income Division at Samsung Management, “Interest rates falling faster… reexamine strategy”

The recent strength in the bond market is due to the calming of capital flows toward the stock market in the first half of the year.

Lee Yoon-hee, head of Samsung Asset Management's bond management division, made this assessment regarding the recent strength of bonds in an interview with Yonhap News held at Samsung Asset Management in Gangnam-gu, Seoul on the 6th.

It was explained that rather than money moving out of stocks into bonds, it was a process of normalizing the demand base for bonds, which had weakened sharply in the first half of the year.

He pointed to the sharp weakening of the demand base as a factor that put pressure on the domestic bond market this year. The explanation is that this easing of concentration has had an impact on the recent strength of bonds, as the ability to purchase bonds has decreased as funds have flowed into stock investments.

However, he emphasized that the investment strategy for next year needs to be reexamined from the beginning due to the faster-than-expected interest rate decline. Initially, they expected a sideways trend in the first half of next year followed by a decline in the second half of the year, but as the expected interest rate level was reached early, they became cautious about investing in an attempt to increase prices due to a further decline.

Director Lee said, “It is time to rethink policy interest rates, prices, and the economy.”

Prices, especially oil prices, were cited as key variables for next year's market. Unlike the semiconductor-centered growth, there are sectors left out of the economic recovery, so price trends are important to determine the need for additional tightening.

As an overseas variable, we looked at the scale of facility investment and financing of artificial intelligence (AI) companies. As the borrowing required for large-scale investments has put a burden on global interest rates, changes in future investment plans may also affect the bond market.

He also expressed the view that a decline in interest rates cannot be unconditionally welcomed. If the interest rate drop is excessive, the expected returns of new investors may be lowered and the inflow of funds may weaken. We believe it is time to focus on securing profits at an appropriate interest rate level rather than chasing additional price increases.

He believed that the strategy of seeking 4-5% profits by taking advantage of higher interest rates next year is still effective.

The following is a Q&A summarizing the main points of the interview with Director Lee.

-- How do you evaluate the recent decline in domestic bond interest rates?

▲ I believe that the excessively high interest rates are in the process of being normalized. In September, the rise in global interest rates due to large-scale financing by AI companies also affected the domestic market.

In Korea, it is important that the concentration of funds into the stock market, which drove up interest rates in the first half of the year, has calmed down. Rather than a large amount of money flowing out of stocks into bonds, the situation in which the bond demand base was rapidly weakening has improved.

Insurance companies, which had been selling bonds in the first half of the year, have turned to buying, and demand related to retirement pensions and delayed bond purchases are also coming in. If there is a limited possibility of a repeat of stock market leveraged investment like the first half of this year, the supply and demand burden in the bond market may also be eased.

-- What do you think of the Bank of Korea’s future base interest rate path?

▲ Samsung Asset Management changed its outlook from one additional increase to two increases last October. Considering growth prospects and the need to respond to inflation, the final base interest rate was expected to be 3.5%.

However, based on the current feelings of market participants, there is doubt as to whether it can be raised twice. This is because it is a K-shaped economy in which the benefits of growth are concentrated in some sectors, and the decline in assets due to falling stock prices is also a burden.

I believe there will be more positive factors in terms of supply and demand until the end of the year. It is not easy for market interest rates to rise as government bond issuance decreases and demand related to retirement pensions and purchases of funds that have not been available for purchase come in.

-- What are the outlook for next year’s bond interest rates and investment decisions?

▲ Initially, the trend was expected to trend sideways until the first half of next year and then decline in the second half of the year. It is expected that the interest rate increase will be completed in the first quarter of next year and that growth momentum will be greater in the first half of the year. It is expected that the burden of high oil prices will gradually ease.

However, the expected interest rate level was reached too quickly. The US political structure and the financing conditions of major companies have also changed, making it difficult to apply existing forecasts.

From now on, it may be premature to make investments aimed at increasing prices due to further declines in interest rates. Policy interest rates, prices, and the economy must be reexamined from the beginning.

-- What investment strategies are effective at the current interest rate level?

▲ The strategy of pursuing profits of about 4-5% by taking advantage of the increased interest rates is still effective. However, this is a strategy that includes not only purchasing bonds but also increasing investment size through repo borrowing (short-term funding).

At this time, the difference between the interest rate of investment bonds and borrowing costs is important. If the base interest rate rises less than expected, the burden of repo borrowing costs may also be smaller than expected. Management that pursues performance relative to the benchmark needs to check market conditions while responding centered on a neutral level.

Keeping interest rates falling is not necessarily a good thing. Although the performance of held bonds improves, if the expected returns of new investors are lowered, the inflow of funds may weaken. A stable interest rate at an appropriate level is better for maintaining investment attractiveness in the future.

-- What are the variables to pay most attention to next year?

▲ Prices are higher than growth. Even if the Korean economy is doing well, especially in the semiconductor sector, if interest rates are raised, sectors at the bottom of the K-shaped economy will be hit harder. Nevertheless, the reason for tightening is ultimately prices, and oil prices are the key among them.

Overseas, we need to look at the scale of AI facility investment and borrowing. If Big Tech reduces facility investment more than expected, the amount of financing for related companies may also decrease sequentially.

As the burden of fiscal deficit continues, how companies' investment and borrowing plans change is important for overseas interest rates. There may also be a ripple effect domestically through the stock market and global interest rates.

-- What did you focus on the most in risk management this year?

▲ This is a strategy that utilizes the difference in interest rates by maturity in the ultra-long term section. At the beginning of the year, strong long-term bonds were expected based on inclusion in the World Government Bond Index (WGBI), but the speed of fund inflow was slower than expected. The fact that the interest rate inversion between 10-year and 30-year Treasury bonds was resolved and the interest rate difference widened significantly also affected the performance.

Afterwards, we focused on adjusting the range of strategy use and avoiding excessive positions overall. For credit bonds, risk was managed by looking at supply and demand rather than increasing investment just because the additional interest rate increased.

Risk management is not only about reducing losses, but also leaving room for the next investment decision. Since then, performance has improved as the interest rate gap by maturity has narrowed and interest rates have fallen.

-- Samsung Asset Management’s bond management competitiveness.

▲ Systematic investment decision-making based on research. We look at not only bonds, but also stocks, macroeconomics, AI investment, and financing trends. Opinions are shared between operational departments weekly and monthly, centered around the research center.

This system acts like a lighthouse for managers when the market moves differently than expected. Even if you are embarrassed or stressed, it becomes the basis for staying centered and judging your direction.

I think the biggest strength is that we are trained and gain experience within the system rather than relying solely on the capabilities of individual operators.