Bond markets facing upward pressure on interest rates led both domestic and overseas bond funds to post weak performance in January. As expectations for rate cuts recede, falling bond prices and capital outflows have simultaneously emerged, increasing the burden on bond investors.
According to FnGuide data released on the 9th, domestic bond funds returned -0.19% in January while overseas bond funds returned -0.13%. The underperformance stands in stark contrast to domestic equity funds, which posted returns of 28.25% during the same period.
The domestic bond market has been significantly affected by rising government bond yields. Over the past month, the 3-year Korean Treasury bond yield rose 18.6 basis points, pressuring prices particularly in short- to medium-term maturities. Since bond prices move inversely to yields, price declines offset interest income, dragging down bond fund returns. Analysts attribute the yield increase to concerns over U.S. monetary policy and potential expanded government bond issuance tied to a possible supplementary budget.
Performance diverged sharply based on maturity structure within bond funds. Ultra-short-term bond funds returned 0.25% in January, holding up relatively well. However, general bond funds fell 0.64% and government bond funds dropped 1.44%, bearing the full impact of rising rates. Bonds with longer duration showed greater price volatility in the rising rate environment.
The weak performance was reflected in fund flows. Total assets in domestic bond funds increased by 437.9 billion won during the period, but this was largely driven by inflows exceeding 1 trillion won into ultra-short-term bond funds. Meanwhile, corporate bond funds saw net outflows of 473.3 billion won and general bond funds lost 217.2 billion won—a defensive shift to reduce rate sensitivity.
This trend has continued into February. In the week through February 6, domestic bond funds experienced net outflows exceeding 1.7 trillion won. Outflows occurred across all categories including general, corporate, government, and even ultra-short-term bond funds, marking a broad-based exodus from fixed income.
Overseas bond markets showed similar patterns. During the same period, overseas bond funds saw net outflows of 450.9 billion won, with 301.3 billion won withdrawn from North American bond funds. U.S. Treasury yields have remained elevated amid uncertainty over the timing of rate cuts, while Japanese government bond yields have also risen on expectations for monetary policy normalization, amplifying global bond market volatility.
However, some analysts note that bond valuations are becoming increasingly attractive. With market rates already pricing in approximately two rate hikes, bond investment opportunities could re-emerge over the medium to long term depending on the rate trajectory. Park Bit-na-ra, head of Fixed Income Management Division 2 at Korea Investment Management, said, "The hurdle for a shift to rate hikes will be high in a K-shaped polarized economy," adding that "with domestic consumer price inflation relatively stable and deposit outflows from banks potentially slowing amid recent risk asset volatility, demand should gradually recover."