Korean Bonds Regarded as Safe Asset
Foreigners’ domestic bond holdings hit an all-time high of 8.9 percent of the total on Aug. 20. Specifically, the holdings increased 29.62 percent from 151.3983 trillion won to 196.2404 trillion won from the end of last year to that day and the ratio jumped from 7.3 percent to 8.9 percent in that period.
This month, they bought 5.1 trillion won of bonds in the South Korean market while recording a net selling of 6.5 trillion won in the South Korean stock market.
“This has to do with the fact that the domestic bond is regarded as a safe asset and its yield is very high as compared with the sovereign credit rating of South Korea,” NH Investment & Securities explained, adding, “With risky assets such as stocks fluctuating, the domestic bond higher in yield than the U.S. bond is an attractive investment option.”
The domestic bond yield is much higher than those in the other countries with the same credit rating of AA. For example, the three-year government bond yields were 1.389 percent and 0.1 percent or so on Aug. 23 in South Korea and the United Kingdom, respectively. In addition, the two-year and five-year yields in Taiwan are approximately 0.2 percent and the 10-year U.S. Treasury yield is 1.26 percent. The Bank of Korea is likely to raise the key rate on Aug. 26 and the domestic bond yield is likely to become higher.
“Central banks and national funds account for about 70 percent of the bond holdings of foreigners,” NH Investment & Securities said, adding, “Given the higher yield, they will continue to buy domestic bonds in investing in non-U.S. dollar assets.”
One problem is that government and monetary stabilization bonds account for most of their investment in the domestic bond market. According to the Financial Supervisory Service, their government and monetary stabilization bond holdings add up to 150.8 trillion won and 35.2 trillion won, respectively. “Their investment in corporate and bank bonds and long-term government bonds need to be increased for the domestic bond market to grow further,” the Korea Financial Investment Association pointed out.