Most Korean government bond money market funds (MMFs) are showing negative deviation rates as of July 21, raising concerns that redemption risk could increase if the Bank of Korea implements back-to-back interest rate hikes in July and August. The negative deviation rates, which measure the gap between book value and market value, indicate that market interest rates on MMF-held bonds have risen. Market participants warn that while redemption probability remains low, consecutive rate hikes could strain short-term liquidity if redemptions begin, particularly for certain funds where deviation rates are approaching -0.09%.
Government Bond MMF Deviation Rates Reach -0.09% in July
According to the bond industry on July 22, major government bond MMFs all showed negative deviation rates as of the previous day. The negative deviation rates have expanded since June, when government bond MMFs began showing widespread negative conversions. Some funds are approaching deviation rates of -0.09%. The current negative deviation reflects that market interest rates on bonds held by MMFs have increased. Government bond MMFs have remaining maturities of 40-60 days. The bond market is currently pricing in both August and October rate hike possibilities, meaning an August rate hike could trigger additional sharp rate increases.
Asset Management Dealers Assess Redemption Risk as Low but Monitor Specific Funds
Asset management company officials assessed that while redemption probability due to expanding negative deviation rates remains low, concerns could grow around certain funds. One asset management dealer stated, "Since the Gangwon Province ABCP incident, investors seem to prefer maturity redemption over redemption in most situations," but added, "If additional funds flow in significantly under current conditions and back-to-back rate hikes occur, losses could increase." The dealer noted, "Since market rates actually declined after the July Monetary Policy Board meeting, the possibility of significantly expanded negative deviation rates does not appear large."
Another asset management dealer said, "Negative deviation rates are widening slightly, but most are not at concerning levels," while adding, "If back-to-back rate hikes are implemented, there could be impact centered on specific funds." A third dealer stated, "If rates are raised for two consecutive months, the situation could worsen," emphasizing, "Time must be given for maturity repurchase."
Bank of Korea to Consider MMF Redemption Risk in Rate Decision
The Bank of Korea's Monetary Policy Board is expected to determine the base rate path by comprehensively considering inflation outlook, dollar-won exchange rate movements, and MMF redemption possibilities. A Bank of Korea official stated, "The Monetary Policy Board will decide by comprehensively considering all factors surrounding the monetary policy environment and their repercussions."
FAQ
What are negative deviation rates in Korean government bond MMFs?
Negative deviation rates measure the gap between book value and market value of bonds held by money market funds. As of July 21, most Korean government bond MMFs showed negative deviation rates, with some funds approaching -0.09%. This indicates that market interest rates on MMF-held bonds have risen since June.
Why are asset managers concerned about back-to-back rate hikes?
Asset management dealers warn that if the Bank of Korea raises interest rates in both July and August consecutively, negative deviation rates could expand further. Market participants note that while redemption probability remains low, consecutive rate hikes could strain short-term liquidity if redemptions begin, particularly given that government bond MMFs have remaining maturities of 40-60 days.
