Selling Spree of Bonds
The local bond market has been shrunk dramatically due to geopolitical crisis on the Korean peninsula which has continued from last month. The interest rate of treasury bonds has increased and foreign investors have continued to sell bonds.
According to a report titled “Bond Market Trend in September” from the Korea Financial Investment Association (KOFIA) on October 12, the interest rate of a three-year treasury bond stood at 1.888 percent a year as of the end of last month, up 14.1 basis points (bps) a month earlier. A basis point is one hundredth of a percent. The interest rate of five-year and 10-year treasury bonds also grew more than 10 bps during the same period, while that of a one-year rose 6 bps. The interest rate of bonds with maturities of 20 years to 40 years increased 3.3 to 3.9 bps.
The rise of interest rates for treasury bonds is largely due to foreign investors’ selling spree caused by concerns over North Korea’s nuclear threat and increasing global interest rates. Foreigners had net bought bonds for eight consecutive months this year but has shown a selling trend from August. Foreign investors net sold a total of 2.25 trillion won (US$1.98 billion) worth of bonds – 1.57 trillion won (US$1.39 billion) of government bonds and 576.5 billion won (US$508.38 million) of monetary stabilization bonds – last month.
Market experts believe that the foreign investors’ selling spree will continue for a while and recommend to make a prudent investment rather than an investment driven by low prices. Lee Mi-sun, a senior researcher at Hana Financial Investment, said, “Interest rates on bonds will be stabilized in the short term after the holidays but the won will remain weak in the medium and long term. There are individual bullish factors of domestic bonds, such as a slowdown in the growth rates next year related to renegotiation for the Free trade agreement (FTA) and delay of rising interest rates, but foreign investors’ weaker investment sentiment for local currency assets had a bigger impact.”
The issuance of bonds was worth 52.1 trillion won (US$45.94 billion) last month, up 600 billion won (US$529.24 million) a month earlier. About 7.1 trillion won (US$6.27 billion) worth of corporate bonds were issued due to preemptive financing to blue-chip companies before the Chuseok holidays, showing a 3.3 trillion won (US$2.92 billion) increase, or 85.6 percent, from the previous month. The estimated amount of corporate bond demand stood at 2.5 trillion won (US$2.21 billion), 36 cases, up 700 billion won (US$618.37 million), or 12 cases, from the same month last year. The amount involved totaled 6.2 trillion won (US$5.48 billion) and the participating rate, which divides the amount involved by the estimated amount of demand, reached 248.3 percent. The trading volume of bonds over the counter amounted to 395.7 trillion won (US$349.56 billion) due to an increasing volatility of market interests, up 20.6 trillion won (US$18.2 billion) from August.