Domestic institutional investors increased lending of bonds as of late on the assumption of some bond rate increase but their foreign counterparts are pulling down the interest rate through spot purchase. In short, the institutional investors are caught up with by foreign investors.
According to the Korea Financial Investment Association, the balance of lending has increased by close to four trillion won in just 10 days since January 28 to amount to 24,038.5 billion won on February 12. The balance had reached 26 trillion won back in November last year but declined to 19 trillion to between 20 trillion won earlier this year.
Bond lending is used to sell bonds after borrowing them and buy Treasury bond futures at the same time. Domestic investors take up most of that type of transactions. Foreign investors, in fact, made no bond lending transactions at all during the past one month. 91.81% of the borrowers are securities firms, 5.77% are banks and 1.68% are others as of now.
Domestic institutional investors recently bet on an interest rate rise and increased the balance as expectations for a base rate decrease weakened. Though the key interest rate was expected to be lowered during the first quarter of this year until as recently as early last month, it is now forecast to be frozen for a while with the US Treasury bond rate rising along with the won-dollar exchange rate.
The problem is that the bond rate is falling this month. That of the 10-year benchmark Treasury bond rose from 2.99% to 3.12% last month but has fallen to 3.04% as of February 12. The movement has been led by foreign investors. They recorded a net buying of bonds worth 617.1 billion and 654.6 billion won on the first and fourth day of this month, respectively. The total net purchase amounts to 2,882.1 billion won in this month alone.
“Last week, foreign investors increased their purchase in the spot and futures market to cause some drop in interest rate,” said Kim Sang-hoon, Hana Daetoo Securities research analyst, adding, “It seems that they consider Korea as the major victim of the weak-yen policy.”
Under the circumstances, market participants are paying attention to the Monetary Policy Committee meeting scheduled for February 14. If the base rate is adjusted downward there, domestic institutional investors cannot avoid loss. Even if the rate is frozen, the loss is inevitable provided foreign investors continue their net purchase.