Foreign Investors Dump Korean Stocks after U.S. Bond Market Signal

Capital outflow from the South Korean stock market is accelerating after the 10-year U.S. Treasury yield exceeded the psychological barrier of 3%. The pace is even faster than during the inflation tantrum in February this year.

On April 25, foreign investors posted a net sale of 766.9 billion won (US$690 million), the largest since the Bernanke shock on June 21, 2013, in the KOSPI market. For reference, the amount was 663 billion won (US$596 million) on January 31, immediately before the Dow Jones Index fell 2,000 points amid inflationary pressure. Their net sale continued for four days in a row and the amount totaled 1.9894 trillion won during the period. That day, the KOSPI fell 0.62% and closed at 2,448.81 points.

Experts point out that investors have begun to transfer their funds from emerging markets to advanced economies. The US Treasury bond yield exceeded 3% for the first time in 52 months on April 24 (local time) and is continuing to rise. The US Volatility Index (VIX) gained 10.28% in one day to reach 18.02 and the KOSPI 200 Volatility Index rose 4.27%.

According to experts, the U.S. Treasury yield is expected to rise again in the near future and South Korea’s bond rate is unlikely to catch up with it for a while. The current gap is 45 bp and it is likely to widen with time. In the South Korean bond market, the 10-year government bond yield rose 3.6 bp and closed at 2.762% on April 25, when the Treasury bond yield further rose to 3.012%.

The Treasury bond yield exceeded 3% in more than four years as high-risk assets such as stocks and crude oil have become more attractive amid easing concerns over the trade war between the US and China. On April 18, the international oil price broke the US$60 to US$65 per barrel mark in about two months and the yield jumped to 2.9% or so. It is likely to reach 3.2% sooner or later as the U.S. is planning to adjust its interest rate four times this year and once next year.

Under the circumstances, the difference between the South Korean and U.S. bond yields is predicted to widen. At present, the consensus of the market is that the Bank of Korea will raise the key rate only in July this year. In addition, the final key rate of this year is estimated at 2% or so given the low inflation rate, a slowdown in employment, and the possibility of export reduction attributable to a strong won. Then, the 10-year government bond yield is unlikely to exceed 2.75%.