In comparison to inventory, when looking at new orders, it seems that the manufacturing PMI will likely fall further in the next few months. Therefore, based on the ISM manufacturing index, there is a higher possibility that the manufacturing industry will deteriorate further. In theory, bond yields are expected to become more positive. Especially when it comes to government bonds. Hello, this is Yeongwon. Today, let's take some time to briefly think about bond investment strategies considering the major macro indicators, in other words, the macro environment that will unfold in the future. Recently, the most common concern and topic of discussion is whether the stock market is in a bubble or not. So, if we briefly look at some hints that can test whether the current market is in a bubble or not, this is how it goes.

Most people find it uncomfortable to invest in stocks right now, especially with the current trend of going all-in on AI stocks. It feels like a bubble might be forming. Secondly, here's an interesting point. When everyone starts saying, It's not a bubble anymore, and the market leans towards the idea that not everyone is in a bubble, that's when the market is likely at its peak, right at the bubble. So, think about whether the current situation is like that or not. It would be good to take a closer look. Now, getting to the point, let's talk about the bond rally. When I mention the bond rally, it means that bond prices are steadily rising. In particular, when I talk about the bond rally, I'm referring to the Treasury bond rally. So, when is

When asked if the bond rally would continue, typically in the market, people say, Now the economy will continue to be good, and interest rates will not go down. If sentiment in the market shifts towards a hard landing, a bond rally could actually occur. This information is from a report released by Bank of America last week. What this report shows is the ISM manufacturing index, which is considered important in the U.S. Among the two PMI indicators, the one we particularly focus on in the U.S. is the ISM manufacturing index. This regional indicator, if you look here, is based on 50 as a benchmark. Below 50 indicates a contraction, and above 50 indicates expansion. In reality, the performance of the ISM manufacturing index and global stocks compared to bond yields is.

There is a strong correlation. In other words, if the ISM manufacturing index falls, the color also goes down. So, when this goes down, it means that government bonds are better than stocks. Conversely, when it goes up, the blue color going up means that stocks are performing well. It's a common sense, right? Because the IS manufacturing index reflects the manufacturing industry in the United States, if the economy worsens, stocks slow down a bit, and government bonds improve. Conversely, if the economy improves, bonds will become less interesting, stocks will perform well, and so on. This is the current situation that has been continuing recently. However, the PMI index has been rising from the current situation. But if it starts to turn down significantly, there is a high possibility that bonds will outperform stocks relatively. Only until the first half of the year.

I talked about lending, and if the U.S. economy starts showing signs of slowing down, especially in labor, hard lending talks will likely increase again. From that point on, there will be a more pronounced bond rally, meaning bond prices will rally, and interest rates will continue to decline. It seems highly probable that this will happen. So, let's take a closer look at what will happen to the PMI index in the future because, as I mentioned earlier, the PMI index has a significant impact on stocks and bonds. Once we look at the PMI index, currently, the PMI index has slightly recovered this time, crossing over 50 in the previous month, then dropped back below 50 to 48 points. However, to confirm whether this is a temporary drop or a trend, we can look at the PMI leading indicator, which usually provides insight into whether it is a temporary or a downward trend.

This is a new order index. Of course, you should look at the new order index compared to the inventory. This is a leading indicator of the PMI index. However, the leading indicator has recently dropped a lot. In other words, when looking at new orders compared to inventory, it seems that the manufacturing PMI will fall further in the next few months. Therefore, looking at the ISM manufacturing index, there is a higher possibility that the manufacturing industry will deteriorate further. In theory, this would rather be a positive factor for bond markets. Especially in an international context. So, in summary, in the macro environment, the PMI index is currently below 50 and is expected to fall further. Therefore, I mentioned that the bond rally, namely Treasury, would improve. From the same perspective, now looking at credit, corporate bonds, IG investment-grade.

I have bonds and ineligible for high-yield investment bonds, but I will take a look once. So, here in the hard, if you look, they divided the phases into four using the PMI index. Let's take a look. This is data analyzed over the past 25 years from 1999 in the microband. If you look now, you can see it like this. When ISM PM ISM was at 50, there are four phases. One is the recovery line here. I'm not sure how to explain this when it's at 50, but when it starts to recover, it becomes a recovery phase. Expansion is already above, and going further up is called expansion here. And slowdown is currently above 50, but if it slightly weakens, it will be the slowdown phase here. And contraction has already dropped below 50, and if it drops further, it will be a contraction. So, to summarize, it will be like this: 50.

In the following, there is a somewhat recovering phase and it gets better at 50 or above, and then it's a declining phase for two years, and it gets worse below 50. It seems like it will be like this. Where do you think you are currently? Oh, I already gave you a hint. Where are we? We are currently around 48. So, looking at the leading indicator of PMI, it seems like it will drop further. So, theoretically, in which phase of the manufacturing PMI are we now? It seems to be in a contraction phase. Therefore, for example, in the case of high yield bonds, when is the performance the best? Let me show you. When you see a recovery, that is, when it hits bottom below 50 PMI and starts to recover, that's when the performance is the best. So, the most related performance is the best. And when is the weakest performance? When it drops below 50 and continues to fall further, it becomes weaker. And when it slows down after reaching its peak, it gradually weakens.

It gets better. In fact, your Hilde bonds are structured to perform similarly to stocks. That's why when you look at hints, it seems like that's the way to go. In any case, currently, there is a slowdown or contraction. So, transitioning from a slowdown to a contraction, right? That's the structure. Therefore, gradually, looking at the weight of corporate bonds in the U.S., it is recommended to decrease it. Now, let me explain a bit about the U.S. interest rates and bondholders with a macro perspective. As you know, the U.S. interest rate spread is between the 10-year and 2-year or 10-year and 3-month. First, if you look at the 10-year and 2-year, isn't it currently inverted? It's inverted by about 50 basis points. After 1920, it has inverted a total of ten times.

It was reversed, but among the sections that have been reversed since 1920, the current longest period of reversal is in progress. So, it is a fact that it is currently the longest reversal in history. And in the past 70 years, since 1950, in the midst of economic recession in the United States, there have been nine instances of interest rate reversals. However, it has not reversed yet. Anyway, that's the case. Therefore, this phenomenon of interest rate reversal has about a 90% accuracy based on the 10-2 year criteria, which is a fact. Secondly, it is a fact that the longest period of reversal since 1920 is currently in progress. Now, let's look at the data a bit more closely. In the case of 10-2 years, it did not enter a recession only once. However, when looking at 10-3 months, after the reversal since 1920, it did not enter an economic recession.

There is no opposition, 100%. So, when 100,000 is reversed in 3 months, it is a fact that it has entered an economic recession by 100%. On average, when 100,000 is reversed in 3 months, after the reversal, it usually enters an economic recession about 5 months later. In this case, it has already been progressing for 20 months. It hasn't entered a recession yet. Therefore, despite this, the phenomenon of the yield curve inversion is a very important indicator of an economic recession. So, why is the phenomenon of yield curve inversion considered as a direct indicator of an economic recession? The reason is that when we typically look at the 3-month period of 100,000 first, what happens is that the reversal of 100,000 in 3 months is linked to the annual interest rate. So, long-term interest rates are low, let's look at it first, you see, it's like this, it's set up like this, long-term interest rates...

Low, for example, a 10-year and here, a 3-month one, right? A 3-month interest rate means it is high. So, in conclusion, regarding the 3-month interest rate, ultimately, it seems to be linked to the annual interest rate. Therefore, ultimately, if the annual interest rate increases, it means that short-term interest rates have risen. This inversion indicates that the Federal Reserve has excessively raised interest rates because the 3-month interest rate is linked to the annual interest rate. The 10-year government bond rate is linked to the macro, meaning it is based on the judgment of market participants deciding the capacity of the macro. Therefore, ultimately, when short-term interest rates are significantly inverted, it means that the annual interest rate is too restrictive. So, in the end, with the title I have here, if this misunderstanding about inversion persists, in a situation where the economy worsens, it leads to an inversion of the long-term.

The phenomenon is now unfolding, we are in a steep slope. I will show you a bit of what was reversed. Things that were reversed are now unfolding. When the long-term interest rate rises like this, what should you invest in fundamentally? You should not invest in credit. So, when the long-term interest rate rises, you need to look at what to invest in and what not to invest in. When the 10-2 year bond yield is sharply reversed, the credit market becomes a bear market. When the reversal is resolved, the credit market becomes a bear market. Looking from the perspective of bonds, let's check the rally of the Treasuries. In the past, when there was such a sharp reversal, even during these stiff times, when there was a 32 to 250 basis point conversion to a plus, the spread was like this.

An event occurred, and in the year - 40 basis points to 250, 8 basis points upward conversion happened. At this time, the virtual interest rate expanded, and now in this case, it has become 13 basis points - 13 basis points, 285 basis points pro, 155 basis points, 250 basis points pro. If you look here now, this is considered an investment-grade bond. So, when it comes to high-yield bonds, it means that the virtual interest rate expands significantly. Therefore, as you can see here, the short and long-term interest rates are fluctuating a lot, and when the interest rate curve returns to normal upward movement, it indicates a weakening credit market. It means that it is not advisable to invest, and in this example, it is an IG grade, but the high-yield bonds have increased significantly compared to this. Therefore, as the short and long-term interest rates reverse and return to normal, it is not advisable to invest in corporate bonds, but rather in government bonds.

You need to invest because when the company's virtual interest rate widens, it means that the national bond rate goes down. When the national bond rate goes down, it means that the national bond price goes up. Lastly, this is a period of economic downturn in the past 70 years of the U.S. Federal Reserve interest rate curve. This shows that during the Federal Reserve's interest rate hike cycle over several years, sometimes it ended with a soft landing, and sometimes with a hard landing. If you look here, about three times it ended with a green color, which means a soft landing, avoiding an economic downturn. Whereas the rest, during the yellow periods, all entered an economic downturn. Therefore, with the current prolonged interest rate hikes, when interest rates were raised to this extent since 2000, they all led to an economic downturn.

We were in a bit of a slump, so the conclusion is like this. We have tightened our policy by more than 5% in a short period of time. From the perspective of bond investors, what will happen in the future? Interest rates are expected to go down, right? So, when we lower the interest rates, there are two scenarios that follow after raising them softly. Will it be a soft landing or a hard landing? From a current perspective, if it becomes a soft landing, it improves to level 1 for international investors. And if it becomes a hard landing, the government bond prices improve to level 2. What does this mean? A soft landing means that the interest rates will be a bit, a soft landing means that the Federal Reserve...

Appropriate interest rate cuts can create a soft landing for the economy. In this case, without a severe economic downturn, the central bank interest rates and market interest rates decrease. Consequently, interest rates will fall restrictively. This means that bond prices will rise but in a limited manner. On the other hand, if the Federal Reserve fails in its interest rate monetary policy and lowers rates due to a worsening economy, the situation may lead to a significant decline in bond yields. A substantial drop in international interest rates may result in a bond rally, causing bond prices to increase significantly. Therefore, predicting the current market is not easy, but from the current perspective, bond investments may improve if a soft landing is achieved.

When it becomes a hard landing, it improves to level 2. With just this level of drawing, how about assessing the current market? Today, I would like to briefly explain how we should view government bonds and credit assets from the perspective of bond investors in the current macroeconomic situation. Thank you.

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