According to the Korea Financial Investment Association on October 16, foreign investors, which left the South Korean bond market, are coming back again. Foreign investors, who showed the selling spree in the bond market in August and September, net purchased 707.9 billion won (US$627.02 million) worth of bonds in the over-the-counter market this month. This is because foreigners are making an investment in the domestic bond market again as geopolitical risks are reduced.
The problem is that foreigners still don’t show a firm inflow of investment. Interest rates on bonds are still on the increase and South Korea has a high level of the premium of a credit default swap (CDS), which is an indicator of risks of bankruptcy.
Foreign investors are making an investment again as North Korea hasn’t made any more armed provocation threats. In fact, South Korea expected more provocative acts by North Korea on October 10 to coincide with the anniversary of the founding of the North Korean Communist Party but North Korea didn’t make any of the acts. Accordingly, foreigners net bought 276.8 billion won (US$245.39 million) worth of South Korean bonds on October 10. Government bonds had the highest share of the net purchase with 179.2 billion won (US$158.87 million), while short-term monetary stabilization bonds had the lowest share with 97.6 billion won (US$86.52 million). Foreign investors have been making an investment mainly in government bonds since October 10 and the daily net purchase reach 100 billion won to 200 billion won (US$88.65 million to 177.3 million).
Professor Kim Yong-ha from Soonchunhyang University said, “It is true that South Korea has risks to invest but foreign investors cannot find a good investment other than South Korea because South Korean companies put up a good show.”
There is an inflow of foreign investment to the bond market again but it is too early to feel relieved. There are still negative signs in many indicators.
First, interest rates on bonds still show a rising trend. According to the Bank of Korea, the interest rate on the three-year government bonds increased from 1.75 percent at the end of August when geopolitical risks escalated to 1.89 percent at the end of last month and then 1.92 percent as of the October 13 again. In general, interest rates on bonds rise and higher interest rates brings down bond prices when geopolitical risks escalate due to North Korea’s provocation.
South Korea’s CDS premium still remains high. The higher bankruptcy risks there are, the higher bankruptcy premiums a country get. South Korea’s CDS premiums stood at 76 bp on September 27, reaching the highest in 19 months. The figure remained at the 70 bp level since then and then dropped to 69 bp on October 12 and remained at 69 bp on October 13.