Foreign Investors Sell 4 Trill. Won of Won-denominated Bonds for Past Month

As the United States keeps raising its interest rates, foreign capital is flowing out of the South Korean bond market. Foreign invstors sold a whopping 4 trillion won (US$3.52 billion) worth of won-denominated bonds for the past month.

According to investment banking (IB) industry sources on Oct. 18, the foreign ownership of won-denominated bonds stood at 110.21 trillion won (US$97.06 billion) as of Oct. 16. Nearly 570 billion won (US$501.98 million) of foreign capital left the country on the day alone.
 

The foreign ownership of won-denominated bonds hit a record high on August 29 at 114.45 trillion won (US$100.8 billion). However, the figure fell to some 110 trillion won (US$96.87 billion) after foreigners withdrew more than 4 trillion won (US$3.52 billion) of capital in a month and a half.

Bond experts cited the rise in U.S. bond interest rates as the main reason. As the bond interest rate increased in the U.S., the net expected rate of return on won-denominated bonds decreased, leading foreigners to reduce their purchases of Korean bonds. Kang Seung-won, an analyst with NH Investment & Securities Co., said, “With the increase in the cost of raising funds in U.S. dollars, foreigners’ demand of won-denominated bonds will go down further next year.”

In fact, many experts think that there will be an additional rise in U.S. bond interest rates. After the Federal Reserve System reaffirmed its stance that it would adopt tightening measures, the interest rate on U.S. government bonds closed higher on Oct. 17 (lcoal time). The interest rate on 10-year bonds rose to above the 3.18 percent level. According to the minutes of the Federal Open Market Committee (FOMC) in September, which was unveiled on Oct. 18, a majority of members supported progressive rises in interest rates.

However, experts predicted that foreigners’ withdrawal from the bond market would not have a great impact on the domestic bond market. This is because foreign investors account for only 6 percent of the domestic bond market, unlike the stock market.

Meanwhile, the domestic bond interest rate slid to a year-low last month but it has been on the rise again. The interest rate on 3-year treasury bonds was at 2.023 percent as of Oct. 17 after dropping to 1.893 percent last month. The interest rate on 10-year treasury bonds also reached a year-low at 2.254 percent last month but rose to the 2.3 percent level again.