“Sold for nine months, then bought 10 trillion won in October” ... Dramatic reversal in foreign investors’ Korean government bond futures flows [fn Market Watch]

[Financial News] Foreign investors have turned to buying in the domestic government bond futures market, shifting supply and demand in the bond market. After net selling 9.5 trillion won worth through September this year, they have bought 10.1 trillion won worth this month alone, turning the cumulative balance for the year to net buying. Analysts say foreign buying is pushing government bond yields lower as much of the concern over further Bank of Korea (BOK) base rate hikes has already been priced into the market and Korea’s relative fiscal soundness has come into focus.
According to the bond market on the 18th, foreign investors have net bought 10.1 trillion won worth of government bond futures this month. They have offset the approximately 9.5 trillion won in cumulative net sales from January through September in less than a month, bringing cumulative net purchases since the start of the year to about 600 billion won. This marks a clear reversal in foreign investors’ government bond futures flows, after they recorded net sales of nearly 14 trillion won over the course of last year.
Fueled by heavy foreign buying, yields on 3-year Korean Treasury bonds fell to 3.87%, while 10-year yields fell to 4.284%. The bond market sees foreign buying of futures as putting downward pressure on yields on cash government bonds.
The reversal in supply and demand is being attributed to concerns over rate hikes having already been priced in. Although the BOK raised rates in both July and August and signaled the possibility of further hikes, analysts say market rates had already reflected much of the tightening stance as early as May and June.
Im Jae-gyun, a researcher at KB Securities, said, “The BOK’s rate-hike stance had been largely priced into the market since May and June,” adding, “With the market pricing in a final base rate of around 3.50%, the reduced likelihood of rates rising higher than expected has worked in favor of foreign buying.”
Korea’s relative fiscal soundness compared with other major economies is also acting as an incentive to buy. While fiscal concerns are growing in major economies such as the United States and France, Korea is seeing increased tax revenue amid strong semiconductor industry conditions, along with rising expectations that government bonds will be repaid using excess tax revenue. With fiscal risk emerging as a key factor in global bond markets, analysts say Korean government bonds have become relatively more attractive.
Technical factors have also added to buying. Analysts say trend-following investors known as CTAs (commodity trading advisors) have entered the market as the 5-day moving averages for both 3-year and 10-year government bond futures have recently risen above their 20-day moving averages. The rise in futures prices as yields fall is prompting further buying.
Foreign buying may continue in the short term. Researcher Im said, “In the past, buying has continued for five business days even after foreign investors recorded large net purchases in the government bond futures market,” adding, “Foreign investors’ net buying of government bond futures may continue in the short term, potentially pushing yields lower still.”
However, analysts say the decline in yields may be limited even if foreign buying continues. Taking into account geopolitical uncertainty in the Middle East and inflationary pressure from high oil prices, KB Securities put the short-term floors for 3-year and 10-year Korean Treasury bond yields at 3.87% and 4.24%, respectively.
[email protected] Kim Hyun-jung Reporter