The bond market is larger than the stock market.
Usually, who do you think holds the most influence in the stock market?
Hedge funds, pension funds, wealthy individuals, or corporations... those might come to mind.
But the “players” in the bond market are on a different scale.
Governments themselves sit at the table by default, and massive institutions—knowingly or unknowingly—have a foot in it as well.
That's due to the inherently stable nature of bonds.
So it's not unreasonable to think of them as just slightly riskier than deposits but with slightly higher interest. Under normal conditions, that interpretation is fine.
“So what you’re saying is... we’re no longer in that ‘normal’ state, right?”
“Like I said earlier. The bond market mainly reacts to credit ratings and interest rates... and interest rates are about to spike.”
Sure, the stock market will be affected if interest rates rise. When bonds fall, stocks generally rise—so in that moment, stocks might go up.
But the stock market won’t swing as wildly as the bond market.
Stocks are affected by a company’s vision, broader economic conditions, and all kinds of factors, whereas the bond market is largely governed by two concentrated variables: credit and interest.
“Let me give you a simple analogy. Imagine you’re playing rock-paper-scissors. If you win, you get money. If you lose or tie, you pay. Would you play?”
“Personally, I wouldn’t. Unless someone really likes gambling...”
“Okay, then what if winning gives you 20,000 won, but losing or tying only costs 10,000? Or let’s say you’re really good at rock-paper-scissors and can maintain over a 50% win rate? Then what?”
Only then did Seo Ji-yeon tilt her head thoughtfully.
“In that case... the expected value evens out, right? So it would depend on the person.”
“That’s the stock market. In that case, uncertainty becomes your shield. But... bonds are different. This isn’t rock-paper-scissors. It’s like playing Russian roulette with a semi-automatic pistol.”
You can see it coming.
Bond pricing formulas already include interest rates. They’re not uncertain variables—they’re constants.
How much you’ll lose, and how much the price drops...
It’s already half-determined. The moment the U.S. Federal Reserve announces a rate hike.
Daehwa Investment Bank Conference Room.
I had called in the other directors for a meeting for the first time in a while.
“It looks like the U.S. Fed will raise rates. At least 1% over the next year.”
A sigh escaped the room.
“Haha, looks like it’s time to get back to work.”
People tend to overlook us because Alpha Fund has gotten so massive, but Daehwa Investment Bank isn’t some small fry either. I mean, it’d be strange not to thrive when I have so much knowledge of the future.
“Well..., Korea has a relatively closed economy and high base rates, so I don’t expect major effects here.... But for other countries, the currency crisis will definitely deepen.”
It’s common for countries to follow U.S. interest rates. If U.S. rates are high and ours are low, that means U.S. financial yields are higher—who’s going to hold onto their own currency in that case?
They’ll exchange it for dollars and invest in the U.S.
But if they raise their rates in line with the U.S., their economy will stagnate... and any country already dealing with economic slowdown won’t be able to withstand it.
Just think of Japan. They’ve kept ultra-low interest rates for decades and still had to suffer massive stagnation.
Some people misunderstand Japan’s low rates. It’s not that low interest caused the recession—it’s that the recession forced them to lower rates, and even after all those years, it didn’t solve the problem.
But they can’t just freeze or cut rates either. If the currency crashes, you’ve got a foreign exchange crisis. Anyone who remembers Korea’s IMF bailout knows how terrifying that is.
Try to fix one thing and something else pops up—it’s like whack-a-mole. Just thinking about having to manage that gives me a headache...
The U.S. Fed has it easy, really. All they have to consider is inflation, GDP, financial markets, the dollar’s exchange rate, U.S. hegemony, money supply, margin requirements, investment bank regulations, market stability, and employment...
Hah, all of that riding on a single interest rate decision by the Fed. Honestly, isn’t that kind of incredible? No wonder the current Fed Chairman, Greenspan, is called the “Maestro.”
If I’d been born in the U.S., I’d have gone to the Ivy League, gotten a PhD in economics, and seriously gunned for a Fed board seat. To move the entire global economy with my decisions... what a thrilling sensation that would be.
Oops. Zoned out for a second.
I slapped my cheek and cleared my throat.
“Anyway, let’s leave global affairs for later. The important thing is that France is pretty much wrapped up now. So our next focus is bonds.”
Director Seo nodded with a satisfied expression.
“So we’re finally getting into bonds for real. You’ll start with futures, right?”
Because bonds are so large and stable, they’re often traded via derivatives. And since I love derivatives, of course I won’t leave them out.
“Yeah, we’ll trade bonds via futures for now. As for interest rate swaps, they’re a bit much to handle here—so we’ll leave those to Alpha Fund. We’ll just deal with futures.”
I handed out a neatly organized portfolio to the directors. As always, it was a flawless plan, and they couldn’t stop themselves from praising me in awe.
“As expected, you’re amazing, Miss!”
“Haha, shouldn’t we be calling her President now?”
“Ahaha, ‘President’ makes me sound old. Just ‘Miss’ is fine.”
Mhm. ‘Miss’ sounds better.
If anything, I’d prefer something like Chairwoman—but ‘President’ just doesn’t have the right ring to it.
Ha Yeong-il was once again rushing through Wall Street.
—“Set up swap contracts contingent on interest rate hikes. Hit up a few investment banks and you’ll get deals in no time. Just skim a bit off the top and move on. Should be able to do it eight times, five million dollars each... I’ll leave it to you.”
‘Japanese government bonds have already dropped quite a bit..., but in the U.S., expectations still lean heavily toward a freeze. We could get good terms.’
He didn’t question it. As always, the prediction would be right.
—“Don’t go overboard, though. Let’s keep it moderate. Even if we can predict the policy direction, how far it’ll go still depends on human factors.”
Of course she added that.
But when someone says “minimum 1% hike within a year,” you know their definition of “moderate” is wildly different from everyone else’s.
“Hmm..., really. Are you serious? Betting on a rate hike?”
The IB director asked politely. While many had predicted a hike, few believed it would come this early in the year.
“You know how it is. If you wait until it’s obvious, it’s ◆ Nоvеlіgһt ◆ (Only on Nоvеlіgһt) already too late. No one’s expecting this. You think Chairman Greenspan’s going to give us a heads-up? Not a chance. Rates stayed frozen all last year—now it’s time to move.”
“...Alpha Fund sure is loud, considering you’ve never even stepped into the bond market. What is this, another ‘Big Short’? Predicting bubbles with some fancy math or whatever...?”
Ha Yeong-il smiled subtly.
“Exactly. Internally, we’ve determined the bond bubble is due to pop. And we don’t just rely on math—we factor in everything, analyze it meticulously, economically, before making a call.”
“Damn it, I don’t know what trick you pulled..., but I’d better be prepared.”
“So? Are you going to take the swap deal or not?”
“No. I’m betting on a freeze. And besides..., isn’t this deal the payoff for insider info? Who lures someone in by telling them where the trap is?”
A thick fountain pen dragged across the paperwork, leaving a black trail. The interest rate swap contract was signed.
Closing his briefcase, Ha Yeong-il shook hands and said,
“Calling it a trap—if I weren’t with Alpha Fund, you would’ve scoffed at my prediction and signed the deal anyway. That’s how this game works, right? A place where people betting on a rise and those betting on a fall coexist.”
“Ha! That’s what amateurs say. Even you—if the Fed Chairman says the market’s overheated or collapsing, wouldn’t you immediately shift your portfolio?”
“Alpha Fund has an 80 to 90% hit rate—do you think I’d ignore that?”
“...Didn’t you just ignore it?”
The director shook his head.
“No, I believed you. That’s why I signed. I need to sell off bonds in advance.”
You can’t just dump bonds without a safety net. You need to hedge your risk—and that’s what this swap deal was.
“Hmm..., and I can’t be the only one holding the bag, so I’ll introduce you to a few others. Citigroup, Jefferies—they’ve got stock short teams. They’ll take the deal. Just don’t tell them it came from me.”
With a satisfied grin, Ha Yeong-il wrapped up the deal.
“Ahaha, thanks. I’ll land a few more contracts thanks to this.”
“Don’t mention it. Anyway, if I want to dump bonds now, I’d better split the load fast... Looks like I’ll be busy, so I’ll be going.”
And then came February.
On the Fed’s rate decision day, an unsurprising surprise rocked the market.
[Fed announces sudden rate hike... 25bp increase]
[Expectations of a freeze shattered... Market shaken by Fed’s unprecedented move]