By Yoon Sung-won
Foreigners have sold off bonds worth over 3 trillion won in two days this week as the nuclear test of North Korea earlier this month has increased tension on the peninsula.
The government and financial sources said the selloff is unlikely to lead to an exodus of foreign investors. But the financial market here is expected to suffer from uncertainties for a while as North Korea’s Kim Jong-un and U.S. President Donald Trump continue their war of words.
The selloff started Tuesday afternoon when a foreign investor sold a Korean government bond worth 410 billion won. Sales followed of more treasury bonds, worth tens of billions of won, raising the amount to 1 trillion won.
About three hours later, foreign investors put up for sale more treasury bonds worth hundreds of billions of won each. About 1 trillion won worth of treasury bonds were sold in five minutes at that time.
On Tuesday alone, foreigners disposed of treasury bonds worth about 2.1 trillion won. According to the Bank of Korea (BOK), it is the biggest daily selloff by foreigners in the history of Korea’s bond market which opened in 1997. Foreigners also recorded over 1.6 trillion won in net sales of bond futures on the day.
The selling mode of foreign investors didn’t stop the next day. They continued to trade away bonds worth 1 trillion won on Wednesday. They also made a massive disposal of bond futures.
In particular, most of the government bonds that were sold between Tuesday and Wednesday were 10-year bonds. And most of them were five to seven years away from maturity.
“In the bond market, most of the offerings are typically ones that are scheduled to mature in less than a year,” an industry source said. “It is unusual that so many long-term bonds with maturity so far off are put up for sale in the market in droves.”
The selloff came amid signs of an exodus of foreign investors due to increased geopolitical risks in the Korean financial market. Foreigners turned to selling in August, net-selling listed stocks and bonds worth 4.5 trillion won in a month.
The heightened tensions on the Korean Peninsula seem to be part of the reason for the capital flight.
The situation continues to worsen, and this week the U.S. flew B1B Lancer bombers off the North Korean coast. The U.S. Armed Forces flew the bombers further north of the Demilitarized Zone (DMZ) than any American warplanes have flown in the 21st century.
Pyongyang responded by threatening to carry out missile attacks against the U.S. mainland.
Some market watchers suspect U.S. investment management company Franklin Templeton Funds may be behind the massive selloff of Korean won-denominated bonds.
“Many come up with the possibility Franklin Templeton Funds led the selloff,” Hana Financial Investment researcher Lee Mi-seon said. “The U.S. company is presumed to have net sold bonds worth 2 trillion won in late June and purchased 2 trillion won of bonds the next month. They tend to trade away massive amounts of bonds and buy bonds again in a similar scale a few days later, to roll over their won-denominated bonds.”