Move of Capital
SEOUL, Feb. 5 (Yonhap) – Investors are putting money in bonds, defying expectations that better economic situations and the US Fed’s reduced assets purchases will trigger a capital move into stocks and other risky assets, data showed Wednesday.
The yield on benchmark 3-year Treasurys stood at 2.85 percent on Tuesday, hitting a yearly low, with that on 5-year and 10-year Treasurys each reaching yearly lows of 3.17 percent and 3.54 percent, respectively. The yield moves opposite to the price.
Market analysts have been expecting capital flight from safe-haven bonds at the start of the year, but capital has been heading to bonds as investors worry more about the global economic situation and increased uncertainty in emerging markets.
“Many thought investors would pull money out of bonds, but such bond sell-offs have yet to materialize, and bond prices are rising,” said Moon Hong-chul, an analyst at Dongbu Securities. “They are coming back to safe assets.”
Analysts said the renewed appetite for bonds is being triggered by concerns that the world’s two largest economies – the US and China – may show a disappointing pace of recovery. Also, a bear run on the local stock market, coupled with turbulence in some emerging markets in the wake of an additional cutback of the US Fed’s bond-purchasing program, sparked a capital flight to the fixed-income assets.
“Investors’ fondness of safe assets has grown sharply due to crumbling situations in emerging markets,” said Lee Jae-seung, an analyst at KB Investment & Securities. “The trend may continue for a while due to lingering market uncertainties.”
Weaker-than-expected manufacturing data from the US and China sent Wall Street and other major stock markets lower on Monday while keeping downward pressure on currencies and other assets in emerging markets, prompting investor flight to safety.
“The weaker-than-expected data came at a time when the US Fed was starting to curtail its stimulus plan,” said Cho Ik-jae, an analyst at HI Investment & Securities. “That means the global economic recovery pace will not be as strong as was expected.”
Analysts said a crisis in emerging markets could last through the current quarter in tandem with global asset rebalancing, which would help boost demand for bonds.
Also, a sluggish move on the local stock market is nudging investors to buy bonds. The KOSPI, the country’s key stock index, sank to a five-month low on Tuesday, closing at 1,886.85 points. The index has lost 6.19 percent so far this year.
The overall market slump is led by foreign investors who have sold a net 2.7 trillion won (US$2.5 billion) worth of local stocks this year, roughly half of their net buying worth of 4.7 trillion won (US$4.4 billion) in total posted last year.
Their sell-off of South Korean shares reached 1.07 trillion won (US$994 million) during Monday-Tuesday sessions. The Korean won also tumbled by the most in more than seven months against the US dollar on Monday as the Fed’s quantitative easing (QE) tapering sparked concerns about capital outflow from emerging markets.
Analysts said foreign investors may continue their selling binge of local stocks for a while. “The Fed’s tapering and economic uncertainties may prod them to continue to unload local stocks,” said Kang Hyun-chul, an analyst at Woori Investment & Securities.
In contrast, foreign investors’ love of local bonds remained firm. Their net buying of local bonds reached 1.32 trillion won (US$1.23 billion) and 2.88 trillion won (US$2.68 billion), respectively, in January and December.
Data compiled by the Financial Supervisory Services show foreign investors held local bonds worth 95.59 trillion won (US$88.80 billion) as of last Wednesday, the highest in three months.
“The continued net buying of local bonds by foreigners shows South Korea is differentiating from other emerging markets,” said Hong Jung-hae, an analyst at Shinyoung Securities.