Amid the continuing US Fed rate hike cycle, foreigners have been buying won-denominated bonds. This stands in stark contrast to the foreign investors’ ongoing selling spree on the domestic stock market. Some market experts say that foreigners’ bond investment is expected to grow in the future as the trade tensions between the US and China tend to push the prices of Korean bonds up.
According to bond market sources on June 21, foreign investors continued to purchase won-denominated bonds this month. The amount of foreign investors’ net bond purchases stood at 4.67 trillion won (US$4.22 billion) as of the 19th.
The figure for the whole of June is likely to exceed the total net purchases of bonds by foreigners in May, which came to 5.09 trillion won (US$4.6 billion). Notably, foreign investors net bought 479 billion won (US$432.9 million) worth of domestic bonds on the 14th, a day after the US Fed raised the benchmark interest rates. The trade tensions between the US and China even held back the rise of coupon rates on domestic bonds.
Experts said current conditions surrounding the domestic economy, including the trade tensions between the US and China, support the fall in the coupon rates on bonds. Lee Mi-seon, a senior researcher at Hana Financial Investment Co., said, “The strengthening US trade pressure on China will ultimately reduce China’s exports to the US and adversely affect South Korea’s exports. The possibility of the US imposing a tariff on imported cars and the prolonged sluggish job growth caused by a slowdown of the manufacturing industry are the key factors that increase uncertainty in the domestic economy in the second half of this year.”
She added, “Even when the Bank of Korea raises the benchmark interest rates in the third quarter, it is likely to be a one-off event unless the economy shows solid growth. This is a good opportunity to buy bonds.”
In particular, South Korea’s business indicators and policies, such as the decline in job growth for four months in a row and polices related to the reduction of working hours and higher minimum wages, are factors that make it harder for the Bank of Korea to raise the benchmark interest rates.
Experts said investors’ strong preference for risk free assets leads to a buying spree of domestic bonds. Lee said, “The top coupon rates on the 3-year and 10-year treasury bonds are unlikely to rise above the 2.25 percent and 2.75 percent levels, respectively.”
Kim Ji-man, an analyst of Hyundai Motor Investment & Securities Co., said, “South Korea's household debt is excessive. When the Bank of Korea raises the base interest rates, it can weaken the domestic economy. The central bank seems to be weighing the timing for a rate hike but it can be quite delayed.”
Foreign investors’ net bond purchases fell to some 60 billion won (US$54.1 million) on June 18 when US President Donald Trump made an announcement on tariffs, fueling the trade war between the US and China. But foreigners’ bond purchases rose to some 160 billion won (US$144.27 million) on June 19. The coupon rate on the 3-year treasury bonds dropped from 2.227 percent on the 14th to 2.164 percent on the 19th. That of the 10-year treasury bonds also fell from 2.502 percent to 2.417 percent.