Although the South Korean stock market is in panic in the aftermath of an economic war between South Korea and Japan, the bond market is calm. Investors’ preference for risk free assets has increased following Japan’s exclusion of South Korea from its trade whitelist.
Demand for bonds remains strong with local and global institutions’ investment in won-denominated bonds. Foreigners also continue to buy up won-denominated bonds. This is large due to a growing preference for risk free assets expectations for a continuous drop in bond interest rates.
Foreign investors purchased 214.40 billion won (US$176.03 million) worth of won-denominated bonds on Aug. 2 when the Japanese government removed South Korea from its whitelist. As institutions at home and abroad swept up South Korea’s government bonds, the price of bonds remained strong.
Credit default swap (CDS) risk premiums remain stable and there are incentives for foreigners’ arbitrage trading. Experts say that Japan’s export curbs do not have a big impact on South Korea’s CDS premiums.
A CDS premium is a fee paid to maintain a CDS contract. To swap the risk of default, the lender buys a CDS from another investor who agrees to reimburse the lender in the case the borrower defaults. If a country or a company has a high possibility of bankruptcy and a high level of credit risks, the CDS premium goes up.
The CDS was 29.0 basis points as of Aug. 2, up 0.96 basis points from the previous month. The figure fell 9.92 basis points from the end of December last year. The incentives for arbitrage trading are still high owing to a weak won.
The stock market is in panic. The benchmark KOSPI index fell below 2,000 points on Aug. 2 and 1,950 points on Aug. 5. The secondary KOSDAQ also sank below the psychologically important 600-point threshold. Outlooks for the stock market remain dim. An increasing number of domestic and global credit rating agencies and securities companies are expressing concerns.