Summary
- It reported that the inclusion of Korean government bonds in the WGBI led to net foreign buying of KRW 4.3tn–KRW 4.5tn, confirming an inflow of global funds.
- It said a substantial share of the inflows is believed to be Japanese funds, including the Government Pension Investment Fund (GPIF), and that expectations are growing for “large-sum” inflows of Japanese money into Korea’s bond market.
- It noted that the WGBI inclusion effect combined with expectations for an end to the U.S.-Iran war drove a sharp drop in Korea Treasury yields, and is likely to help curb upward pressure on rates.
Forecast Trend Report by Period
KRW 4.3tn inflow…mostly Japanese funds
Korea Treasury yields fall sharply
Korean government bonds were added to the World Government Bond Index (WGBI) on the 1st, triggering an inflow of more than KRW 4.3tn in global investment funds, according to market estimates. Japanese capital—previously a negligible presence in Korea’s bond market—is believed to have accounted for a sizable share. The inflows also weighed on market rates, pushing yields lower.
According to relevant government agencies, foreign investors net bought roughly KRW 4.3tn to KRW 4.5tn of Korean Treasury bonds this week (March 30–April 1). Given that foreigners’ net purchases of Treasuries totaled KRW 9.4891tn last month, nearly half of last month’s inflows entered the market in just three days.
In particular, net buying on March 31 (KRW 2.773tn) was the largest since Sept. 30 last year (KRW 2.7995tn). FX authorities view most of the flow as WGBI-tracking money.
A substantial portion of the inflows is believed to have come from Japanese investors, including Japan’s Government Pension Investment Fund (GPIF). Japanese funds are known to account for about 30% of WGBI-tracking assets. Conservative Japanese institutional investors have historically maintained a very low allocation to Korean government bonds. Japan’s share of Korea’s government bond market stood at just 0.3%. Expectations are rising that Japanese money will deploy “large sums” into Korea’s bond market around this time.
The market expects as much as about $60bn of overseas funds tracking the index to flow in through November following the WGBI inclusion. At KRW 1,500 per dollar, that translates to up to KRW 90tn.
The WGBI inclusion effect combined with expectations for an end to the U.S.-Iran war drove a sharp decline in market rates on the day. The three-year Korea Treasury yield fell 0.182 percentage points to close at 3.37% per annum, the lowest level since March 19 (3.329%).
Kim Jina, an analyst at Eugene Investment & Securities, said, “The WGBI inclusion effect could partly offset Middle East risks and inflation concerns,” adding that it “will act as a factor that curbs upward pressure on rates.”
Reporter Kim Ik-hwan lovepen@hankyung.com
Korea Economic Daily
hankyung@bloomingbit.ioThe Korea Economic Daily Global is a digital media where latest news on Korean companies, industries, and financial markets.
