Foreign investors net sellers of South Korean bonds in August for first time in 3.5 years
Quick Look
Foreign investors turned net sellers of South Korean bonds in August for the first time in about 3.5 years, selling 839.7 billion won ($624.8 million) as currency-hedged yield advantages eroded, though passive inflows from WGBI inclusion cushioned the outflow.
AI-generated summary
Why It Matters
Foreign investors had been net buyers of South Korean bonds for years, attracted by yield advantages after currency hedging, but this edge has eroded as U.S. yields rose and the arbitrage spread turned negative.
SEOUL, Sept. 13 (Yonhap) -- Foreign investors turned net sellers of South Korean bonds in August for the first time in about 3 1/2 years, industry data showed Sunday, as the yield advantage from currency-hedged investments declined.
Foreign investors sold a net 839.7 billion won (US$624.8 million) worth of Korean bonds last month, marking their first monthly net selling since January 2023, according to data from investment banks and debt market sources.
They remained net buyers of 63.26 trillion won in the year through Sept. 11, but the amount was down 35.2 percent from the same period a year earlier.
Their Korean bond holdings also fell sharply, dropping by about 12.9 trillion won from a record 356.6 trillion won on July 24 to 343.6 trillion won on Sept. 2. It marked the largest decline over a comparable 27-trading-day period in the past five years.
The slowdown largely reflects the erosion of arbitrage opportunities, as Korean bonds have lost their yield advantage over U.S. assets after currency hedging.
The arbitrage spread fell from 68.3 basis points at the end of last year to minus 30 basis points as of Sept. 10, making currency-hedged investments in short-term Korean bonds less attractive than comparable U.S. dollar assets.
Still, passive inflows tied to South Korea's phased inclusion in the World Government Bond Index (WGBI) have helped cushion the selling pressure, with market watchers saying foreign net selling would have been greater without the WGBI-related inflows.
What to Watch
AI outlook — possibilities, not facts
Foreign net selling of South Korean bonds may continue in the near term if the currency-hedged yield disadvantage persists.
Likely · Within weeks
WGBI-related passive inflows will continue to provide partial support to South Korean bond demand.
Very likely · Within months
Open Questions
- How long will the WGBI-related passive inflows continue to offset active selling?
- Will the Bank of Korea intervene to stabilize bond markets or the won?
- Are domestic investors increasing their bond holdings to compensate for foreign outflows?
