Betting on Government Bond Futures? Foreign Investors Bought 15 Trillion Won Over Two Months

Foreign investors, who had been selling government bond futures aggressively this year, turned to net buying for the second straight month. They bought 5 trillion won worth of futures last month alone, prompting some to interpret the move as a bet on a stronger bond market.
Still, market participants are leaning toward the view that it is too early to read the purchases as a sign of a sustained decline in interest rates. Because bond futures became more attractive after rates surged, investors appear to have bought them for short-term value. They also bought 10-year futures more heavily than 3-year contracts, suggesting a trade centered more on narrowing the yield gap between short- and long-term bonds than on broad-based strength in the bond market.
According to CHECK by Koscom Corporation on the 6th, foreigners posted net purchases of 5 trillion won in government bond futures in June. That followed a shift to net buying in May, when they bought 10 trillion won worth of contracts, extending the buying streak for a second month.
In the government bond futures market, a long position is generally interpreted as a bet that bond prices will rise. Since bond prices move inversely to interest rates, buying futures means betting on the possibility of lower rates. Foreign investors' futures trading has long been used as one of the indicators for gauging market direction, because their trades have tended to follow and amplify existing trends.
“If interpreted in the usual way, the fact that foreign investors turned net buyers of 10-year government bond futures from May suggests the likelihood of a sustained bond rally has increased,” said Kim Chan-hee, a researcher at Shinhan Investment & Securities. “That is because foreign futures flows tend to have a strong trend-following character that amplifies market moves.” However, he added that this year's trading pattern looks somewhat different from the past. “A different foreign flow pattern has been observed this year,” Kim said. “The net buying in futures contracts in May and June appears to have been a valuation call after the sharp rise in yields.”
In other words, rather than buying government bond futures for a prolonged period on expectations that a downward rate trend was beginning, investors stepped in when yields had surged in the short term and bond prices had fallen sharply, making valuations more attractive.
In fact, once rates surged and then entered a sideways phase, additional foreign buying also appeared to slow. Kim said, “The fact that no additional net buying in futures has come in during the period of sideways rate movement since June also supports this view.” Another point of note is that foreigners bought 10-year government bond futures more heavily than 3-year contracts. The gap between foreigners' net buying of 10-year and 3-year futures, which was effectively nonexistent at the end of April, has recently widened to around 140,000 contracts.
Market participants interpret this not as a bet on broad strength in the bond market, but as a “flattener trade” aimed at narrowing the difference between short- and long-term yields. “Rather than reading it as a signal of falling rates or a stronger bond market, it should be seen as short-term bargain hunting after the rate spike and a trade targeting a narrower yield spread between short and long maturities,” he said.