[Edaily Marketin Reporter YunJi Kim ] As global stock markets continue their upward trend amid a surge in artificial intelligence (AI) investments, analysts are suggesting that investors should once again focus on the role of bonds. While bonds were previously viewed as defensive assets that struggled to generate returns during periods of low interest rates, analysts note that their status has now shifted to that of an asset capable of cushioning stock market volatility while securing interest income of around 5–6% annually.

Carol Lai, Portfolio Manager and Senior Research Analyst in the Fixed Income Division at Franklin Templeton, recently told E-Daily, “Bonds are no longer low-yield assets,” adding, “Since no one can know exactly when the stock market bubble will burst, long-term investors need to hold bonds as a diversification asset in their portfolios.”

Downside Risks to the Economy Overshadowed by Stock Market Optimism… Bonds Deserve Attention

Portfolio Manager Lai is an expert who has analyzed the macroeconomy and bond markets in the Asia-Pacific region. After working as an economist at the Monetary Authority of Singapore (MAS), she joined Brandywine Global—a specialized asset management firm under Franklin Templeton—as a bond research analyst in 2008. Following the recent reorganization of Brandywine Global’s fixed-income team into Franklin Templeton’s fixed-income division, he currently serves as a portfolio manager and senior research analyst, responsible for analyzing the Asia-Pacific region’s macroeconomy and developing fixed-income investment strategies.

Manager Lai assessed that there remains significant uncertainty surrounding the financial markets. He noted that while the market has largely priced in the prospect of prolonged high interest rates and the possibility of further monetary tightening, it has not fully factored in the potential for lower-than-expected growth or a correction in the prices of risky assets.

He also expressed caution regarding the stock market. While the AI investment boom is driving up global stock markets, he believes it is uncertain whether this optimism will continue. “Expectations surrounding AI are very strong, but we cannot know if this enthusiasm will last forever,” he said, adding, “The market is not sufficiently pricing in downside risks.”

He also cited inflation as a key variable. He explained that it takes time for prices driven up by supply shocks to stabilize, and that the market must monitor the possibility of secondary effects spreading to wages and service prices. “It takes time for prices to stabilize after a supply shock,” he said, adding, “Above all, we must watch to see if temporary inflation leads to higher wages and service prices.”

His assessment of the bond market, however, differed. He noted that since the prospect of persistently high interest rates is already largely reflected in bond yields, if economic indicators show a slowdown, yields could fall and bond prices could rise; furthermore, he believed that interest income could still be secured at current interest rate levels.

Manager Lai emphasized, “While the need for bonds may not be immediately apparent when the stock market continues to rise,” adding, “Since no one can know exactly when a market bubble will burst, long-term investors need to hold bonds as part of a diversified portfolio.” He continued, “During the pre-COVID-19 era of low interest rates, it was difficult to generate returns from bonds, but the situation has changed now,” adding, “Bonds are no longer low-yield assets.”

Asian Bond Markets Diverge by Country… “South Korea Is Close to Developed Markets”

Regarding the

Asian

bond market, he predicted that while it would be influenced by U.S. interest rates and the dollar, trends would diverge significantly

by country

. He explained that because each country’s growth rate, inflation, and fiscal conditions differ

,

it is difficult to view them as a single market.

On a country-by-country basis, he predicted that the Chinese bond market would be strongly influenced by its domestic economy and stimulus measures. While Japan is expected to continue moving away from ultra-low interest rates toward rising rates, South Korea and Taiwan are projected to track global interest rate movements relatively closely. He assessed that markets in India, Indonesia, and the Philippines could experience increased volatility depending on changes in inflation, fiscal conditions, and current account balances.

In particular, he noted that South Korean government bonds could be viewed by global investors not as high-risk emerging-market assets, but rather as developed-market bonds offering stability and liquidity. The assessment is that, given the country’s economic scale, financial market infrastructure, and sufficient trading liquidity, South Korea is relatively less likely to be exposed to sharp capital outflows—as is common with emerging-market bonds—even during periods of market turmoil. Analyst Lai stated, “Although South Korea is positioned between emerging and developed markets, it is actually much closer to the developed market side,” adding, “Considering its economic scale, the level of its financial markets, and liquidity, it is difficult to classify it as an emerging market.”

He noted that he had invested in South Korean government bonds and won-denominated bonds without encountering any liquidity issues. “I have never experienced trading difficulties due to liquidity in the South Korean bond market,” he said, adding, “Inclusion in the World Government Bond Index (WGBI) will further strengthen this market foundation.” He explained that the inflow of foreign funds tracking the index could support the supply and demand of South Korean government bonds even during an economic slowdown.

Analyst Lai said, “Inclusion in the global bond index means that a steady flow of funds can flow into Korean government bonds even when the economic cycle slows down,” adding, “This will serve as a factor that enhances liquidity and supply-demand stability.”

He also advised that as investment conditions for Korean government bonds improve, domestic institutional investors need to reassess the role of bonds. He argued that investors should not merely compare the nominal yields of stocks and bonds but should instead consider risk-adjusted returns that take volatility and the risk of loss into account. Analyst Lai emphasized, “What matters is not the yield itself, but how much risk one must take to achieve that return,” adding, “Bonds today provide meaningful interest income while enhancing portfolio stability.”