Foreign inflows into Korean bonds hit record pace as safe-haven appeal grows

Korea Herald

7 days ago

Rate cut bets, fiscal strength, WGBI inclusion drive surge in foreign demand for sovereign debt
Foreign investors are increasingly expanding their investment in South Korean sovereign bonds, underscoring their reputation as a safe-haven asset. Expectations of an imminent policy rate cut cycle have further contributed to the surge in offshore demand.
While foreign investors remain cautious about the local stock market amid heightened risks from the US tariff policies, they are actively turning to Korean government-issued fixed-income securities, which are widely regarded as low-risk assets thanks to the country's solid fiscal standing.
According to the Korea Financial Investment Association, offshore investors net purchased Korean government bonds worth 16.1 trillion won ($11.6 billion) in April, following net purchases of 13 trillion won in March. In contrast, they offloaded a net 14 trillion won worth of Korean stocks in April.
'Foreign investors' net buying of Korean government bonds has surged in recent months, as arbitrage opportunities have grown more attractive amid trade tensions and currency uncertainties,' an official from the association said.
Among government bonds, Korea Treasury Bonds — used to finance public expenditures — have seen particularly strong demand.
According to a report from the Ministry of Economy and Finance, the outstanding balance of KTBs held by foreign investors reached 255.2 trillion won in April, a 9.6 trillion won increase from the previous month. Total foreign inflows into government bonds this year have reached 15.7 trillion won.
Foreign ownership of the KTB market stood at 23 percent in April, up 0.8 percentage point from the start of the year. Offshore demand for KTBs has been on an upward trajectory for years, rising from around 2 percent in 2006 to 15.4 percent in 2010 and reaching 20.5 percent in 2022.
Amid this buying rush, the average yield on KTBs has declined, falling to 2.56 percent in April from 3.17 percent in 2022 — effectively lowering the interest Korea pays to secure capital.
Investor sentiment has also been buoyed by expectations of an upcoming policy rate cut. During periods of monetary easing, demand for existing bonds tends to rise, as their fixed coupon rates become more attractive compared to newly issued bonds with lower yields.
The Bank of Korea, which has held its policy rate at 2.75 percent since February, is expected to begin cutting rates later this year in an effort to stimulate the country's export-driven economy, which is under pressure from the US' trade measures.
The Korean government has long prioritized attracting foreign investment in sovereign debt. In the aftermath of the 1997 Asian financial crisis, Korea lifted the cap on foreign investment in listed bonds. Since then, it has introduced additional measures to bolster demand, including omnibus accounts and tax exemptions for foreign investors.
Another key driver of recent demand is Korea's upcoming inclusion in the World Government Bond Index, a global benchmark for sovereign debt managed by London-based FTSE Russell. Korean sovereign bonds will be added to the index in phases from April 2026 to November 2026.
'Making sovereign bonds more appealing to foreign capital is an important agenda for the Korean government,' a Finance Ministry official said. 'Increased demand for government bonds helps lower their coupon rates, effectively reducing the government's borrowing costs.'