The Government Bond Market Is Now the 'Foreigner Farewell Station'

Foreigners' Domestic Bond Holdings Decrease for the First Time in 1 Year and 4 Months
218.4591 Trillion Won... 4.09 Trillion Won Decrease Compared to March
Faster Base Rate Hikes Lower Bond Investment Sentiment
New Government's 50 Trillion Won Supplementary Budget Plan Also Affects

[Asia Economy Reporter Hwang Yoon-joo] The outstanding balance of foreign holdings of domestic bonds has turned to a decline for the first time in 1 year and 4 months.

According to the Seoul bond market on the 13th, as of April (up to the 12th), the outstanding balance of foreign holdings of domestic bonds was recorded at 218.4591 trillion won. This is a decrease of 4.09 trillion won compared to the previous month (222.5491 trillion won).

This marks the first decline in 1 year and 4 months since December 2020, when the number of new COVID-19 cases exceeded 1,000. The outstanding balance of bond holdings reflects trading trends adjusted for bond maturity repayments, indicating that foreigners' net purchases of Korean government bonds, Monetary Stabilization Bonds, and bank bonds have decreased.

As the pace of base rate hikes accelerates, foreign bond purchases have slowed down. With the possibility of interest rates rising, there is no immediate reason to buy bonds. The U.S. raised its base rate by 0.25 percentage points on the 16th of last month (local time) for the first time in 3 years and 3 months. Federal Reserve Chair Jerome Powell also hinted at the possibility of a ‘big step’ (raising the base rate by 50 basis points at once) during the National Association for Business Economics (NABE) event that same month, stating, "If a 0.5 percentage point rate hike is appropriate, we will do so."

In response to the U.S.'s swift moves, voices are emerging that the domestic base rate hike range should be raised from the existing 2.0% to 2.25%. In a survey on next month's Bond Market Survey Indicator (BMSI) conducted by the Korea Financial Investment Association, 50% of bond market participants expected the Bank of Korea to raise the base rate at the Monetary Policy Committee meeting on the 16th.

A bond market official explained, "Since the bond market prices in the base rate in advance, short-term bond yields have already risen," adding, "If the pace of base rate hikes accelerates in Korea as well, yields could rise further, increasing bond valuation losses, which is interpreted as a reason for the subdued buying momentum."

Chu Kyung-ho, a member of the People Power Party and the first Deputy Prime Minister and Minister of Economy and Finance nominee under the Yoon Suk-yeol administration, is arriving at the confirmation hearing preparation office set up at the Korea Deposit Insurance Corporation in Jung-gu, Seoul, on the 11th. Photo by Moon Ho-nam munonam@

Concerns about oversupply of government bonds are also being raised. Increased supply leads to rising yields (falling bond prices) and deteriorating investor sentiment. President-elect Yoon Seok-yeol has pledged a supplementary budget of 50 trillion won, and on the 11th, Choo Kyung-ho, nominee for Deputy Prime Minister and Minister of Economy and Finance, stated that the supplementary budget plan would be submitted early next month. Although the stance is to secure the supplementary budget through expenditure restructuring, experts and the market expect deficit bond issuance to be inevitable. If the issuance of deficit bonds worth 50 trillion won is decided, further yield increases are expected, especially in short-term bonds (3-year and 5-year bonds).

The market is watching whether the trend of declining foreign holdings of domestic bonds will continue. A bond department official at the Korea Financial Investment Association said, "It would be fortunate if the decrease in foreign holdings in April is temporary, but if the decline continues, it could raise concerns about foreign capital outflows from the domestic bond market," adding, "If foreigners sell domestic bonds and exit, the won/dollar exchange rate could rise, leading to won depreciation, which would increase prices of raw materials and imports, resulting in inflationary pressure."

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