The U.S. Treasury bond rate is rising rapidly, adding to concerns over foreign capital outflow. The gap between the South Korean and U.S. interest rates is widening these days while the exchange rate is going up ahead of an inter-Korean summit.
In the KOSPI market, foreign investors recorded a net sale of 439.2 billion won (US$395 million) on April 24 alone, continuing to sell major stocks such as Samsung Electronics and SK Hynix for the third consecutive day. Their total stock sale from April 20 to 24 amounted to 1.223 trillion won (US$1.1 billion) whereas a net purchase of 49.9 billion won (US$45 million) was witnessed until April 19.
In the bond market, foreign investors have withdrawn more than one trillion won from bond funds alone since the beginning of this year.
This is because the U.S. Treasury bond rate is soaring. On April 24, the 10-year Treasury bond rate reached 2.965% after touching 3.0009% the previous day. It is inflationary pressure that is in the background of the movement. At present, the trade war ignited by the Donald Trump administration’s import tariffs and tax reduction policy are adding to the pressure along with a rise in oil price.
The same day, South Korea’s 10-year government bond rate reached 2.726%, showing a gap of 2.39 bp with the U.S. rate. This means at least one condition is already satisfied for foreign capital outflow.
Exchange rate movements are ominous as well. More and more investors are trying to avoid risks in the wake of the global financial panic in February, and the value of the U.S. dollar is rising while that of the won is falling. The won-dollar exchange rate, which recently moved between 1,069 won and 1,070 won per U.S. dollar, closed at 1,076 won on April 24.
“There may be some capital outflow in the short term,” said research analyst Jo Young-moo at the LG Economic Research Institute, adding, “However, large capital outflows are unlikely unless the gap between the U.S. and Korean interest rates is prolonged.”