Preference for Risk-free Assets
With an increasing preference for risk-free assets due to a trade dispute between the United States and China, foreign investors’ South Korean bond holdings hit a record high.
According to a report on the over-the-counter bond market trend for June published by the Korea Financial Investment Association (KOFIA) on July 6, the foreign ownership of domestic bonds came to 110.56 trillion won (US$99 billion) at the end of June, up 2.12 trillion won (US$1.9 billion) from a month ago.
This is because there has been an increasing preference for risk-free assets due to the global trade dispute between the G2 and a continuous reversal of forward exchange rates and Korean won exchange rates has boosted foreigners’ arbitrage. Foreigners net bought a total of 7.5 trillion won (US$6.73 billion) worth of bonds – 4.08 trillion won (US$3.66 billion) of government bonds and 3.23 trillion won (US$2.9 billion) of monetary stabilization bonds – in the past month. The figure increased more than 2 trillion won (US$1.79 billion) from 5.3 trillion won (US$4.75 billion) a month earlier. Shin Dong-soo, an analyst from Eugene Investment & Securities Co., said, “Foreigners’ investments in won-denominated bonds grew despite the increase in a reversal in the Korea-U.S. rate gap, currency depreciation in emerging countries and concerns over capital outflow.
Foreigners net purchased 34 trillion won (US$30.44 billion) worth of won-denominated bonds last year but they bought 33 trillion won (US$29.54 billion) of them in the first half of this year alone, strengthening the selling trend.
The total amount of South Korean bond issuance came to 579.5 trillion won (US$541.64 billion) last year, down 2.8 trillion won (US$2.62 billion), or 0.5 percent, from a year ago. The bond issuance market slightly shrunk compared to the previous month as the issuance of government bonds, special bonds and monetary stabilization bonds decreased. The total amount of South Korean bond issuance came to 56.11 trillion won (US$50.32 billion) in June, down 4.69 trillion won (US$4.21 billion) from a month ago. The balance of the bonds stood at 1,901. 11 trillion won (US$1.71 trillion).
The total amount of government bond issuance dropped 41.1 percent from 14.29 trillion won (US$12.81 billion) to 8.42 trillion won (US$7.55 billion), while that of special bonds and monetary stabilization bonds decreased 6 percent and 14.7 percent, respectively, to 13.81 trillion won (US$12.39 billion) and 5.2 trillion won (US$4.67 billion). The total amount of bank debenture issuance came to 19.57 trillion won (US$17.55 billion) over the same period, up 16.1 percent due to a large-scale bond issuance of the Industrial Bank of Korea. With upcoming meetings for monetary policies around the world and business’ weaker demand for issuance before a rise in the rate of interests, 6.9 trillion won (US$6.19 billion won) worth of corporate bonds were newly issued.