Foreigners, Big Shift from Stocks to Bonds

Foreign Bond Holdings Reach All-Time High Again
Stock Net Selling Funds Shift to Bond Holdings
Base Rate Hike and Yield Curve Inversion Key to Trend Reversal

[Asia Economy Reporter Junho Hwang] Last month saw a large-scale 'money move' of foreign investment funds from stocks to bonds. As preference for safe assets increased, the interest rate inversion phenomenon between Korea and the United States following the Bank of Korea's Financial Monetary Committee's base rate hike this month emerged as an important gauge for maintaining the trend.

According to the Financial Supervisory Service on the 11th, the net foreign selling amount of listed stocks last month was 3.873 trillion KRW, marking six consecutive months of net selling. 3.701 trillion KRW was withdrawn from the KOSPI and 172 billion KRW from the KOSDAQ. With net selling of 3.5 trillion KRW and 100 billion KRW respectively in Europe and the Middle East, the scale of capital outflow increased.

The withdrawn funds flowed into the bond market. According to the Korea Financial Investment Association, the net foreign purchase amount last month was 11.4 trillion KRW. They bought 7.3 trillion KRW in government bonds, 2.6 trillion KRW in Monetary Stabilization Bonds, and 1.2 trillion KRW in bank bonds. As a result, the domestic bond holdings balance recorded 229.3505 trillion KRW, an increase of 3.5 trillion KRW compared to 225.8301 trillion KRW in May. This once again broke the all-time high record.

Due to the base rate hikes by major countries, the investment capacity in risky assets such as stocks decreased, while the attractiveness of the bond market increased, leading to large-scale capital movement. In the case of Korean government bonds, the interest rate level was high compared to the credit rating, and the market interest rate, which rose due to the base rate hike last month, added to the appeal. Additionally, the won-dollar exchange rate reaching 1,300 KRW enhanced price competitiveness. Especially last month, there were many bond maturities, and there was even a situation where 5 trillion KRW evaporated in one day at the beginning of the month. However, as the month progressed, holdings began to exceed the May level.

Lee Hangoo, a specialist at the Korea Financial Investment Association, explained, "Among Asian investment destinations, Korea is attractive when foreigners compose their portfolios," adding, "There is also an advantage in that profits can be generated even during foreign dollar swaps, allowing pursuit of higher interest compared to the base rate."

However, if the Bank of Korea's Financial Monetary Committee scheduled for the 13th of this month raises the base rate and causes an interest rate inversion between Korea and the United States, there is a possibility that foreign funds flocking to the bond market may be withdrawn.

Researcher Lee said, "From this month until September, the most important points will be the trade surplus and whether fiscal soundness is strengthened," and predicted, "If a trade surplus emerges and the Yoon Suk-yeol administration's fiscal soundness strengthening policy proves effective, the attractiveness of Korean government bonds will continue."

Meanwhile, on the same day, the Korea Financial Investment Association announced the Bond Market Sentiment Index (BSMI) created from a survey of bond experts in various fields. 99% of respondents expected Korea's base rate to be raised this month, with an anticipated increase of 0.5 percentage points. On the other hand, 51% of respondents (down from 62% the previous month) expected market interest rates to rise.

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