CONTRIBUTION Going global: Korea's road to WGBI inclusion
Roheet Shah, head of dealer sales APAC at MarketAxess / Courtesy of MarketAxess
Over the past 18 months, Korea’s fixed-income market has stood out as a bright spot in emerging Asia. According to MarketAxess data, Korean won-denominated bonds have been the only Asian local currency bonds to have experienced net better buying both in 2023 and in the past three months.
The recent announcement from index provider FTSE Russell of the inclusion of Korea in the World Government Bond Index (WGBI) has also made Korea’s bond market outlook stronger than ever. The inclusion, which will become effective in November 2025, is expected to draw further inflows into the country of up to $67 billion (90 trillion won) in offshore investor funds.
How did Korea become a key player in emerging Asia fixed income? This article examines the evolution of Korea’s market development, and what lies ahead.
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2022 marked new era for Korean fixed income
The year 2022 was a pivotal time for emerging markets and Korean fixed income was no exception. For example, the beginning of 2022 saw a spike in Korea Treasury Bond (KTB) trading volumes, driven in part by the reaction to the start of the quantitative tightening cycle from central banks worldwide.
As market conditions became more challenging, we observed that fixed income traders, in Asia and around the world, looked more and more to electronic trading platforms as a solution.
The greater workflow efficiency, market accessibility and liquidity depth that they can offer provided additional routes through which to navigate the market volatility.
In September the same year, Korea’s addition to FTSE Russell’s WGBI Watch List marked a pivotal step, accelerating momentum for the country’s fixed income market and intensifying the demand for streamlined cross-border electronic trading solutions.
Then, moving into 2023, Korean policymakers continued to further their commitment to the opening of the fixed-income market.
For example, in late 2023 the Korean government abolished the need for new foreign investors to obtain an Investor Registration Certificate (IRC).
According to a report from the Asian Development Bank, the IRC had previously been a commercial hurdle for “newer,” offshore entrants. Its abolition therefore simplified their investment procedures, encouraging further capital inflows and helping to increase the overall liquidity of the market.
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Finance Minister Choi Sang-mok, center, speaks during a briefing on Korea's inclusion in the World Government Bond Index at the Government Complex Seoul, Oct. 9. Yonhap
Momentum for Korea builds
While index-related inflows may only materialize next year when the WGBI officially includes Korea, there is already plenty of optimism for their arrival among banks, asset managers, central banks and government pension funds, both in Korea and globally.
With the central bank signaling its intent to embark on a rate-cutting cycle, conversations suggest that the market is expecting a pickup in local bond supply in the coming year. The growth and diversification of the investor base spurred by the WGBI inclusion will help to absorb this additional bond supply and to manage any potential market volatility.
In terms of the flows already being observed, a key theme is that there is net better selling in the front-end — defined by its tenure of two years or less — of KTB bonds over the past five years.
Another recent trend that is emerging is the net better buying in the longer-dated bonds (especially 20 to 30 years) in this quarter, with some participants saying it could potentially be attributed to the preparation of the WGBI inclusion given the duration profile of the index. The further expansion across the curve demonstrates momentum for Korean fixed income as a whole.
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Deepening foreign investor access with e-trading
The final preparations for WGBI inclusion are underway, with many banks busy finalizing their readiness.
But a final key piece of the puzzle will be for KTB traders to continue embracing electronic trading technology and infrastructure improvements to connect their market to a wider base of overseas investors and participants.
This will help Korea to fully maximize the success of its inclusion, enhancing market liquidity and access to Korea bonds.
The writer is head of dealer sales for APAC and country head for Hong Kong at MarketAxess.