“Foreign investors net-buy government bond futures for 8 straight trading days”... Buying expected to continue amid US slowdown concerns [fn Market Watch]

[Financial News] As concerns over overheated artificial intelligence (AI) investment in the United States fuel fears of a possible economic slowdown, forecasts have emerged that foreign investors’ buying of domestic government bond futures will continue for the time being. Analysts say that as expectations for further Federal Reserve (Fed) rate hikes weaken and US Treasury yields plunge, expectations for domestic bond yields to fall could support foreign investor flows.
Lim Jae-gyun, a researcher at KB Securities, said in a report on the 23rd, “Considering that confidence in the economy is weakening in the United States amid concerns about an AI bubble, we expect foreign investors’ buying to continue for longer.”
Foreign investors have recently been net buyers in the domestic government bond futures market. On the 12th, they net-bought about 35,000 contracts of 3-year government bond futures, marking the second-largest daily net purchase on record. Although the pace of buying eased somewhat afterward, they continued net buying for eight consecutive trading days through the 13th.
Buying government bond futures is generally a transaction to establish an investment position that benefits from a future rise in government bond prices and a fall in interest rates. Since bond prices and yields move in opposite directions, government bond futures prices tend to rise when yields fall. However, futures trading can reflect a range of purposes, including hedging against risk and arbitrage, as well as interest rate outlooks, so it is difficult to conclude that foreign investors’ buying is uniformly a bet on falling rates.
Yields also fell sharply in the US bond market. The yield on 10-year US Treasuries stood at 4.95% on the 22nd, down 16.6 basis points from the previous trading day. It was the first time the yield had fallen below 5% since mid-September.
As concerns about France’s fiscal outlook intensified, the possibility of an economic slowdown came into focus in the United States, where the Nasdaq fell amid concerns over overheated AI investment. As a result, market concerns about further rate hikes by the Federal Reserve also eased.
In fact, expectations for further rate hikes priced into the US Secured Overnight Financing Rate (SOFR) market narrowed to 66 basis points, from a level that had reflected the possibility of as many as four hikes following the September Federal Open Market Committee (FOMC) meeting.
KB Securities also raised the possibility that the short-term decline in US Treasury yields may have been excessive. The analysis was that the drop in yields was amplified as investors who had bet on rising rates closed out their existing short positions.
According to US Treasury futures positioning data released on the 16th, net short positions in 10-year Treasury futures totaled 988,000 contracts, up 91,000 from the previous week. The explanation is that, with short positions based on expectations of rising yields having accumulated, the unwinding of those positions as yields subsequently fell may have deepened the decline.
A cautious view was also expressed on the scope for further declines in domestic bond yields. The market has priced in a terminal Bank of Korea (BOK) base rate of 3.50%, leaving limited room for yields to fall further from current levels.
Nevertheless, KB Securities forecast that foreign investors’ buying of domestic government bond futures would continue for the time being, given the weakening confidence in the US economic outlook.
[email protected] Kim Hyun-jung Reporter