FSS Warns: "Even Government Bonds Can Incur Losses"—Investor Guidelines

Major Bond Trading Dispute Cases and Key Investment Precautions Revealed

As financial authorities have seen a series of complaints and disputes arising from investments in bonds, such as government bonds that are perceived as safe assets, they have issued guidance for investors based on recent cases. In particular, they emphasized that "even bonds with a low risk rating may result in a loss of principal if sold before maturity," urging investors to thoroughly check for interest rate fluctuation risks and over-the-counter transaction costs.

On July 6, the Financial Supervisory Service released the second installment of its series, "Investor Precautions Learned from Financial Investment Dispute Cases," focusing on major dispute cases related to bond trading and key points for investor caution. This comes in response to the continued stream of complaints from investors who suffered losses after purchasing low-risk bonds, such as government bonds, at the recommendation of sales staff.

First, the Financial Supervisory Service stressed that even low-risk bonds, such as government bonds, can incur valuation losses if market interest rates rise. For example, a 30-year bond with a face value of 10,000 won and a coupon rate of 3% could suffer a loss of approximately 17% if the market interest rate increases by 1 percentage point. This means that while credit risk may be low, interest rate risk does not disappear.

They also advised caution when investing in long-term bonds. Investing in long-term bonds without considering factors such as the investor's financial situation or age can increase the likelihood of having to sell before maturity. In particular, investors for whom principal preservation is important, or those who do not have sufficient fixed income and may struggle to cover urgent expenses such as medical bills, should pay attention to this possibility when considering long-term bonds. The Financial Supervisory Service noted, "The longer the bond's maturity, the more sensitive its price is to changes in market interest rates, and this should be taken into account."

The agency also pointed out the risk of relying solely on the interest rate outlook provided by sales staff. Even market experts find it difficult to accurately predict long-term interest rate trends, and even if the base rate is lowered, bond prices may fall if market rates rise.

When trading bonds over-the-counter, it is essential to check the difference between the average market interest rate and the actual yield applied to transactions. Securities companies often apply a lower purchase yield than the average market rate to account for transaction costs and other factors, which means investors may end up buying bonds at a price higher than the average market price. As a result, it may appear as if an immediate valuation loss has occurred after the transaction, but this is simply a reflection of transaction costs and related expenses.

Additionally, the Financial Supervisory Service advised investors to check whether the same or similar bonds are traded on the Korea Exchange before engaging in over-the-counter transactions, and to compare conditions before making an investment decision. Bonds traded on the exchange can be checked using financial companies' mobile trading systems (MTS), home trading systems (HTS), and the KRX Information Data System operated by the Korea Exchange. Purchasing over-the-counter may result in a higher unit purchase price than on-exchange. However, when trading on the exchange, there may be insufficient bid-ask formation, which could make it difficult to execute trades.

The Financial Supervisory Service stated, "Going forward, we will continue to promptly provide information on major dispute cases and investor precautions related to financial investment products, and if necessary, strengthen investor protection through institutional improvements."

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