Foreign investment in Korean bonds likely to continue: HSBC

Foreigners' investment in Korean government bonds is likely to continue as they see Korean assets as "safe and liquid" following a recent sovereign rating upgrade, HSBC Holdings Plc. said Tuesday.

Recently, global credit appraisers Moody's Investors Service and Fitch Ratings raised their sovereign ratings on South Korea, citing the nation's economic and fiscal sustainability.

Steven Major, the head of fixed-income research at British banking group HSBC, said at a press conference in Seoul that the rationales for the rating upgrade have to do with Korea's "fiscal sustainability, transparency plus the sustainability of the economic positions."

"The most important and distinguishable feature is sovereignty because Korea has its own currency and own interest rate and fiscal policy (unlike cases of European countries)," Major added.

Global liquidity, which is already viewed as ample, is set to increase further as some central banks around the globe are trying to take quantitative easing steps to prop up their fragile economic growth.

The head of the European Central Bank (ECB) Mario Draghi said last week that policymakers agreed to launch an unlimited bond-purchase program, known as outright monetary transactions (OMT), to lower borrowing costs of troubled eurozone countries.

Sustained inflows of foreign capital into Korean bonds are driving down long-term market interest rates in Korea. The yields of three-year and five-year government bonds have stayed below the 3 percent level of the Bank of Korea's key rate.

Foreign investors' holdings of Korean bonds reached 86.9 trillion won (US$77 billion) as of end-August, accounting for 6.9 percent out of the total value of bonds traded on the exchange and over the counter market, according to data by the financial watchdog.

Major said given that liquidity from Europe tends to look for safe and liquid assets with higher returns, Korea is a well-positioned country for such investment.

He also stressed that the ECB needs to take more aggressive quantitative easing steps as the eurozone economy has a chance of falling into a double-dip recession.

The balance sheet of the ECB has been doubled in about five years since 2007, but should be more bloated in order to help funnel liquidity into the crisis-hit region, he noted. (Yonhap)