By Park Hyong-ki
Staff Reporter
Foreigners see the Korean bond market as a gold mine as the interest rate gap widened to as much as 2 percentage points between Korea and the United States and stock markets are in the doldrums worldwide.
Until the rate gap narrows, the inflow of hot money will increase, according to the Financial Supervisory Service (FSS), which reported that foreigners bought 3.4 trillion won of bonds last month alone. For the first time, their cumulative holding exceeded 40 trillion won, accounting for 5 percent of the domestic bond market. Over the past two years, foreign bond investment has jumped over seven-fold, it reported.
The rush of hot money into the bond market came after the U.S. Federal Reserve made a surprise 0.75 percentage point rate cut in response to the global equity meltdown in late January.
Asia stock markets suffered steep losses in the opening week of Jan. 21 on growing concerns of a U.S. economic recession due to the lingering credit crisis. The Fed made another rate cut by 0.5 percentage points to 3 percent last week, widening the interest rate gap between Seoul and Washington, the highest level in three years and six months.
Global investors have sought fixed-income securities as they are considered safer assets than volatile stocks in times of financial turbulence. Thus, the 2 percentage point gap lures investors to invest in Seoul bonds as it can help them reap handsome gains. Bond prices move inversely to yields.
But since the investments are considered speculative, it can negatively impact the market if they increase the rush of fund outflows.
Analysts say although the rising investment in bonds will stabilize the market, negative factors remain as it could lead to a stronger won, which in return, weakens exports, the country's main growth engine. In addition, the surging inflow is bound to add downward pressure on money market rates.
Commercial lenders have already begun to lower interest rates on loans and savings on expectations that the Bank of Korea will follow the U.S. Fed and cut its benchmark call rate at its next monetary policy meeting.
Woori Investment & Securities analyst Peter Park expects bond investments to slow down and the interest gap to narrow. ``The central bank is likely to cut its rate and the Fed may stop its rate cutting campaign until March.''
The last big rushes of hot money into the bond market occurred in the aftermath of the Sept. 11 terrorist attack in the United States in 2001, and when the United States resorted to a low-interest rate policy to stimulate the economy in 2003.
phk@koreatimes.co.kr