The Financial Supervisory Service said that if bonds with low risk ratings, such as government bonds..

The Financial Supervisory Service said that if bonds with low risk ratings, such as government bonds, are sold before maturity, there could be losses, and that people should pay attention to long-term bond investment. In particular, 30-year bonds can cause valuation losses of about 17% if market interest rates rise by 1 percentage point.

On the 6th, the Financial Supervisory Service guided investors on such precautions based on major disputes related to bond trading. The move comes as complaints of disputes have been steadily received that they invested in low-risk bonds at the recommendation of salespeople but suffered losses.

The Financial Supervisory Service said, “Low-risk bonds such as government bonds are classified as safe investment products, but they could suffer losses due to falling market prices.” Government bonds are usually classified as low-risk products in the financial investment product risk rating system due to low credit risk, such as the possibility of bankruptcy of issuers, but if sold before maturity, prices may fall due to rising market interest rates.

Long-term bonds are particularly sensitive to changes in interest rates. Citing 30-year bonds with a face value of 10,000 won and a face value of 3% and a face value/buying interest rate, the FSS explained that a 100bp (1bp = 0.01 percentage point) increase in market interest rates could lead to a loss of about 17%.

Investors whose principal preservation is important, such as senior retirees, should also pay attention to long-term bond investment. The Financial Supervisory Service introduced a case in which an investor in his 70s filed a complaint to the effect that it was an inappropriate recommendation that did not take into account the age of the investor after purchasing 30-year government bonds at the recommendation of a sales staff.

“Bonds with long remaining maturities can suffer unexpected losses if they have to be sold out in the middle,” the FSS said. “Investors who do not have enough fixed income or may need urgent supply such as medical expenses and nursing expenses should consider the possibility of selling in the middle.”

He also stressed that lowering the benchmark interest rate does not immediately lead to an increase in bond prices. Since bond prices are determined by market interest rates, not base rates, bond prices may fall if market interest rates rise even if the base rate falls.

In fact, according to the FSS, the domestic benchmark interest rate fell from 2.75% at the end of the first quarter to 2.50% at the end of the second quarter, but the 30-year treasury bond rate rose to 2.80 to 2.95% in the third quarter and 3.10 to 3.20% in the fourth quarter.

When trading over-the-counter bonds, it is also necessary to check the difference between the public interest rate and the actual trading yield. When selling over-the-counter bonds, securities companies can offer lower interest rates than the public interest rate in consideration of various costs such as labor and computer costs. In this case, the investor may purchase the bond at a price higher than the valuation based on the public interest rate, which may seem to have caused an initial valuation loss.

The Financial Supervisory Service said, “When trading bonds outside the market, investment should be decided in consideration of the difference between the public interest rate and the trading rate,” adding, “We should also check whether bonds with the same or similar conditions are being traded on the exchange.”

Exchange bonds can be found on financial companies’ home trading systems (HTS), mobile trading systems (MTS), or KRX information data systems on the Korea Exchange. However, it may be difficult to conclude exchange transactions if the asking price is not formed smoothly.

The Financial Supervisory Service plans to continue to guide dispute cases and investor precautions related to financial investment products and strengthen investor protection by improving the system if necessary.