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Foreign Investment Rushing to Korean National Bonds
As Korean government bonds gain more credit and the expectations of an interest rate cut spreads, foreign central banks continue to increase their holdings of Korean state bonds
Foreign Investment Rushing to Korean National Bonds
  • By matthew
  • November 7, 2012, 10:25
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Despite worries about the global economy deepening, foreigners have gradually increased investment in Korean state bonds. Following widespread outlooks for additional government rate cuts, yields continue to fall. A downward yield curve means a greater demand for investment and a higher value for the bonds.

Market experts interpret this phenomenon as representing the changing views of foreign investors in regards to Korean bonds. They point out that an increasing number of foreign central banks are seeking for Korean treasuries as an ideal opportunity for investment, with longer-term bonds being preferred these days.

Yields edging down day by day, expectations of a rate cut brewing as foreign investment soars

The yields on 10-year Korean treasuries hit a record low 2.95% on October 4. The market of the day also drew down yields on 3-year bonds to a record low level (2.74%). Experts analyzed that higher credit in regards to Korean sovereign bonds and expectations of a key interest rate cut this month have lowered yields.

In truth, the size of foreign investment in Korean government bonds has doubled in the last five years. According to statistics from the Ministry of Strategy and Finance, the aggregate amount of foreign investment in Korean government bonds (national bonds plus currency stabilization bonds) has expanded from 3.7 trillion won at the end of 2007 to 8.7 trillion won as of the end of August this year. Of this, foreign central banks’ holdings of similar bonds (currency stabilization bonds are issued by The Bank of Korea for the purpose of regulating the volume of the local currency) has exploded nearly 30-fold over the same period, rising from 1.2 trillion won to 31.7 trillion won.

Furthermore, since the national credit rating was upgraded, foreign investors have shown a preference for longer-term bonds in Korea. Studies conducted by Dongbu Securities Co. show that foreigners have bought 33.2 billion won worth of 10-year-or-less Korean treasuries on daily average since the national credit rating upgrade on August 27, more than doubling the buying record (14.5 billion) set the previous year.

European powers preferring Korean bonds due to regional crisis

Until August this year, the major buyers of Korean bonds came from European power economies. Statistics from the Ministry of Strategy and Finance show that Norway and Switzerland made 2.7 trillion won and 1.8 trillion won of net investment in Korean treasuries, respectively (net investment means more net buying than redemption at maturity). As feelings of anxiety in the Euro zone economy heightened, their central banks, which had experienced difficulties finding a good place for investment, came to buy Korean government bonds, according to market researchers. In addition, non Euro countries in Europe have also invested their Euro reserves in Korean government bonds. Shin Dong-soo, a researcher at NH Nonghyup Securities Co, said, “Considering the low yields on bonds issued by European power economies such as Germany and The Netherlands, Korean treasuries are attractive because the Korean government has shown sound fiscal operations and yields on state bonds are relatively high.”

In the meantime, experts say the trend began to change in September. Many countries from around the world have increased investment in Korean bonds since Korea’s national credit rating was upgraded, with US funds returning to Korea following an announcement by Washington policy makers of a further round of quantitative easing (an unconventional monetary policy where the central bank injects money into the market by purchasing financial assets from commercial banks and other private institutions).

An official from the financial authority said “A huge amount of net investment in national bonds was made by the US, the UK, France and Singapore in September, and this must have resulted from the upgraded national credit rating.” Moon Hong-cheol, a researcher at Dongbu Securities Co, said, “The Norwegian and Swiss central banks will likely have less appetite for Korean bonds because the Euro has begun to gain power against the dollar since the end of July.

However, given the affluent amount of dollars in circulation around the world, chances are that some Asian emerging countries like China, Thailand and Malaysia will increase investment in Korean bonds in an attempt sustain the value of their own currencies.”