Selling Bonds and Stocks, the Two-Faced Foreigner

Popular Due to High Credit Ratings and Interest Rates
Net Bond Purchases for 4 Consecutive Months
Surpasses 140 Trillion Won for the First Time Ever
Stocks See Net Selling for 3 Consecutive Months

[Asia Economy Reporters Eunbyeol Kim, Jihwan Park] Foreign investors have continuously purchased domestic bonds this year, pushing bond holdings to a record high. While investments in domestic stocks have steadily decreased due to the impact of the novel coronavirus disease (COVID-19), investments in safe assets such as bonds have seen four consecutive months of net buying since January.

According to the "April Foreign Securities Investment Trends" report released by the Financial Supervisory Service on the 11th, the balance of foreign investors' domestic listed bonds reached 140.494 trillion won as of the end of April. This marks the first time the amount has exceeded 140 trillion won. It increased by 17 trillion won over four months from 123.6519 trillion won at the end of last year.

Foreign investors net purchased 9.321 trillion won worth of listed bonds last month. After subtracting 1.938 trillion won in matured repayments, the net investment amounted to 7.383 trillion won. Foreign investors have maintained a streak of net bond purchases since January. The net bond purchases, which were 6.211 trillion won in January, dropped significantly to 3.479 trillion won in February, but amid the full-scale turmoil in international financial markets caused by COVID-19, net purchases increased to 7.399 trillion won and 9.321 trillion won in March and April, respectively.

This contrasts with the continuous selling trend of foreign investors in domestic stocks. Last month, foreign investors net sold 5.393 trillion won worth of domestic listed stocks. After a net purchase of 408 billion won in January, they sold 3.225 trillion won in February and 13.45 trillion won in March, maintaining a net selling trend for three consecutive months.

The reason foreign investors are buying domestic bonds is analyzed to be due to Korea's sound economic fundamentals, such as fiscal soundness, as well as the attractive interest rates. Foreign investors prioritize economic fundamentals and credit ratings when investing overseas, and Korean government bonds are evaluated as having good credit ratings while offering higher interest rates compared to bonds of major countries. Korea's sovereign credit rating is AA according to Standard & Poor's (S&P), the same as the UK, France, and Belgium.

Foreign bank branches in Korea have increased bond purchases significantly by raising short-term borrowings. According to the "March 2020 Balance of Payments (Preliminary)" announced by the Bank of Korea on the 7th, borrowings under other investment liabilities increased by 15.1 billion dollars in March. This is the highest monthly borrowing amount ever recorded, nearly 20 times the amount borrowed in February. Among these, the increase in short-term borrowings maturing within one year reached 14.14 billion dollars. Even during the foreign exchange crisis, short-term borrowings did not increase to this extent.

The Bank of Korea estimated that a significant portion of this was used for domestic bond investments or securities company loans through foreign bank branches. Lee Hyunjin, head of the International Balance of Payments Team at the Bank of Korea's Economic Statistics Bureau, explained, "Based on internal assessments, it was found that foreign bank branches mainly took on the borrowings rather than domestic banks," adding, "The demand for foreign currency was met through short-term borrowings."

Foreign bank branches have historically earned profits through arbitrage in Korea during crises. They can generate arbitrage profits by exploiting differences between spot and forward exchange rates (swap rates) and interest rate differentials between domestic and foreign markets. Foreign bank branches procure dollars, convert them into Korean won in the swap market, and invest in domestic bonds. By purchasing government bonds using the interest rate differential and swap rate differences, they can conduct risk-free arbitrage trades that guarantee minimum profits, thus generating risk-free net income.

A foreign bank official explained, "When there is a dollar shortage, arbitrage transactions where dollars are more easily procured overseas and invested in bonds occur frequently," adding, "This is a common business practice when dollars are scarce." Foreign bank branches also earned high profits during the 2008 financial crisis.

This content was produced with the assistance of AI translation services.