Foreign investors attracted to Korean bonds as virus impact continues

By Kim Bo-eun

Foreign investors purchased over 54 trillion won in won-denominated bonds from January to August this year, data from financial institutions showed, Thursday.

This contrasts with their selling of over 29 trillion won in stocks in the same period. The purchasing of bonds is seen as a move to stabilize investments amid the continued COVID-19 pandemic. The 54.7 trillion won of bonds foreigners purchased in the first eight months of this year exceeds the 54.4 trillion won of bonds they bought in all of 2019.

Major buyers of the bonds are central banks and sovereign funds around the world. They are seen to be investing in Korean bonds based on their credit rating and yield. Korea's 10-year bonds carry a yield of 1.518 percent as of Wednesday. This compares with the U.K.'s 0.238 percent yield for 10-year notes. Korea and the U.K. have the same AA sovereign credit rating.

Korea's yield is the highest among 10-year bonds of countries with an AA rating.

“Korea's key rate stands at 0.5 percent and the yield for treasury bonds is also decent. Based on the preference for safe assets amid the pandemic, the demand for Korean bonds is expected to continue for the remaining year,” said Hwang Sei-woon, an economist at the Korea Capital Market Institute.

The yield of local bonds is backed by the government's bond issuances to cope with COVID-19. The government issued 97.1 trillion won in deficit bonds up until the third supplementary budget for this year. The amount will exceed 100 trillion if the fourth supplementary budget of over 7 trillion won is fully covered by deficit bonds.

The increase in government bond issuance is likely to lead to a further rise in yields.

“It appears funds from foreign investors are flowing into Korean bonds based on the fact that Korea has been afflicted to a lesser extent by COVID-19,” said Anh Yea-Ha, a fixed income analyst at Kiwoom Securities. “While investors may need to note the impact Korea's fourth supplementary budget will have on its fiscal conditions, investments in bonds are expected to continue given Korea's fiscal stability compared to other countries.”

Foreign investors held 152.24 trillion won in Korean bonds as of Sept. 7.

They sold 29.4 trillion won of stocks in the same eight months of this year.

Offshore investors' ownership in Korean stocks hit a four-year low in August as they turned to net sellers of local shares last month.

Foreigners sold a net 1.07 trillion won of Korean stocks last in August, a turnaround from net buying from the previous month. They purchased a net 582 billion won in local shares in July.