INTERVIEW Demand for Korea Treasury bonds robust due to WGBI inclusion optimism: MarketAxess, NHIS

Deputy Prime Minister and Finance Minister Choi Sang-mok holds a virtual meeting with Euroclear CEO Peter Sneyers at the Seoul Government Complex in Gwanghwamun, Thursday. Courtesy of Ministry of Economy and Finance

Demand for Korea Treasury Bonds (KTBs) has been and will continue to be robust from foreign sovereign wealth funds, pension funds, central banks and asset managers, according to MarketAxess, a U.S. electronic trading platform for the institutional credit markets, and NongHyup Investment and Securities (NHIS) on Tuesday.

Underpinning the optimism is Korea’s relative strength in fiscal soundness, market maturity and transparency, as well as long-term structural growth trends, they said.

Also at play is Korea’s inclusion in the World Government Bond Index (WGBI), operated by the London-based FTSE Russell. An inflow of up to $67 billion (98 trillion won) in offshore investor funds is expected in November if included.

The finance ministry said government efforts would continue reassuring offshore investors of KTB investments' strengths.

Second Vice Minister of Economy and Finance Kim Yoon-sang held a virtual meeting on Tuesday with more than 130 global investment bankers, asset managers, insurers and hedge funds from London, Hong Kong, Singapore and Japan. Included were BlackRock and JPMorgan.

Deputy Prime Minister and Finance Minister Choi Sang-mok also held a virtual meeting with Euroclear CEO Peter Sneyers on Thursday to share Korea’s simplified tax and foreign exchange rules for potential offshore KTB investors with the Belgium-based financial market infrastructure group specializing in the central securities depositories.

“Investing in KTBs remains a rational choice for global investors,” NHIS said in an interview with The Korea Times.

According to the finance ministry, about 70 percent of foreign holdings in Korean won-denominated bonds belong to sovereign wealth funds and central banks, which are typically long-term investors.

The NongHyup affiliate said these investors primarily seek higher carry relative to Korea’s credit rating and currency diversification, as they already hold significant U.S. dollar-denominated assets.

“Korea stands out as an AA-rated country that is not pegged to the U.S. dollar,” it said. “It offers one of the highest real yield carry levels within this rating bracket. As a result, for sovereign wealth funds and central banks, investing in KTBs is seen as almost mandatory.”

Korea is a rational choice, given a number of considerations for offshore investors evaluating government bonds across different countries. Included are fiscal soundness and interest rate levels, particularly for investors diversifying their currency exposure.

Also critical are market maturity, transparency and liquidity, since derivatives markets need regulatory clarity to ensure smooth market entry and exit.

However, Roheet Shah, MarketAxess' head of dealer sales for the Asia-Pacific and Hong Kong, said headwinds linger.

“There is a lot of optimism around the expected inflows on the back of the WGBI inclusion,” he said. “However, some of the headwinds have mostly been around calls for a supplementary budget and its potential impact to the bond supply demand dynamics, along with some discussions around banks finalizing their infrastructure setups for Euroclear settlement.”

Second Vice Minister of Economy and Finance Kim Yoon-sang holds a virtual meeting with more than 130 global investment bankers, asset managers and insurers at the Seoul Government Complex in Gwanghwamun, Tuesday. Yonhap

The NHIS echoed Shah's sentiment.

“Both factors can be a challenge for foreign investors,” the NongHyup affiliate said.

In the early stages, the Euroclear settlement faced numerous challenges and confusion. Many investors were unfamiliar with the process or uncertain about how to navigate it.

However, thanks to the Korean government’s efforts and the steps taken by relevant institutions to refine regulations and streamline the framework, the number of investors actively trading through Euroclear has been growing at an accelerating pace.

“We have seen an exponential increase in client inquiries regarding Euroclear-based settlements, reflecting the rising demand for this mechanism," the NHIS said.

As for the extra budget talks, it remains a latent risk factor, it added.

“The immediate market impact of the supplementary budget has already been digested domestically. The key concern is that existing investors may hesitate to increase their KTB allocations due to uncertainty surrounding future supply and fiscal policies.”

KTB investors include asset managers, central banks and government pension funds across various geographies such as Singapore, Hong Kong, Japan, Australia and a number of European countries, according to Shah.

Korea, along with the Philippines, was one of the few bright spots in Asia's emerging markets from September to December last year in terms of net inflows on the MarketAxess platform. For context, China saw consistent net outflows month-over-month.

Bank of Korea Gov. Rhee Chang-yong said in November that the WGBI inclusion illustrates the significance of implementing a structural reform in the financial system.

“Not only government bonds but also commercial bonds will be sold in the won, stabilizing the value of the Korean currency,” he said. “This, in turn, will bolster the country’s floating exchange rate system and the monetary policy efficacy.”