SEOUL, July 06 (AJP) — South Korea's financial regulator on Monday warned that even government bonds, long regarded by many retail investors as one of the safest investments, can generate significant losses if interest rates rise.
The Financial Supervisory Service (FSS) issued the warning as part of its latest investor education campaign on common investment disputes after complaints increased from investors who suffered unexpected losses after buying low-risk bonds, including Korean government bonds, on brokerage recommendations.
The FSS said that while government bonds carry little default risk, their market value can fall when interest rates rise, meaning investors who sell before maturity may incur losses.
A 30-year government bond with a face value of 10,000 won that pays a 3 percent annual interest rate could lose about 17 percent of its market value if market interest rates rise by one percentage point, it said.
The FSS also urged investors to be cautious about buying long-term bonds, saying they should consider whether they may need access to their money before the bonds mature. Investors who want to preserve their principal or who may need cash for unexpected expenses should be particularly careful.
"The longer a bond's maturity, the more its price will fluctuate as market interest rates change," it said.
The regulator further cautioned investors against relying solely on sales representatives' interest-rate forecasts when making investment decisions. It noted that market interest rates do not always move in line with the central bank's policy rate, meaning bond prices can still fall even when the central bank cuts rates.
The FSS also urged investors to compare prices before buying bonds directly from brokerages, as transaction costs and dealer spreads can make those bonds more expensive than similar ones traded on the Korea Exchange. Exchange-traded bonds may offer lower prices, although they can be harder to buy because of limited liquidity.
"We will continue to provide timely guidance on investment risks and strengthen investor protection where necessary," the FSS said.
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