South Korean Retail Investors Bought $3.9 Billion of U.S. Treasuries in Third Quarter, Most Since 2011

Buying Surged as 10-Year Treasury Yield Topped 5%

Largest Quarterly Total Since 2011

Stronger Won Also Reduced Buying Costs

South Korean retail investors are buying U.S. Treasuries in size. As the yield on the 10-year Treasury climbed above 5%, more investors shifted from bank deposits and savings products into U.S. bonds.

According to the Korea Securities Depository on Sept. 30, domestic investors bought about $3.9 billion worth of U.S. Treasuries from July through September. That was the largest quarterly total since the depository began compiling related data in 2011. Buying turned positive in July, reversing from net sales of 226.2 billion won in June. Net purchases totaled 1.207 trillion won in July, 2.4733 trillion won in August and 1.7058 trillion won in September.

Investors shifted into bonds to lock in higher interest income as U.S. Treasury yields climbed to their highest levels in two decades. The 10-year Treasury yield rose to 5.24% on Sept. 28 from 4.48% on July 1, the highest level since 2007. Over the same period, the 30-year Treasury yield increased to 5.56% from 4.97%.

By contrast, appetite for U.S. stocks cooled somewhat. South Korean investors' net purchases of U.S. equities fell 57.7% to 2.6676 trillion won in August from 6.3109 trillion won in July. Some overseas investment funds that had been concentrated in stocks appear to have moved into bonds as Treasury yields surged.

The decline in the won-dollar exchange rate also reduced the burden of investing in U.S. Treasuries. The won-dollar rate fell about 5.7% to 1,359.4 won per dollar on the morning of Sept. 29 from 1,441.8 won on Jan. 2, the first trading day of the year. That meant investors needed less won to buy the same amount of U.S. Treasuries.

Retail investors can buy U.S. Treasuries directly through domestic brokerages or invest in bond exchange-traded funds listed in the U.S. or South Korea. In both cases, investors must convert won into dollars, so a lower won-dollar exchange rate reduces the entry burden for new investors.

Still, investors need to account for the possibility that market rates may rise further. Investors who bought long-duration bond ETFs over the past one to two months, betting on a rise in U.S. long-term yields, posted losses. RISE U.S. 30-Year Treasury Active closed at 7,955 won on Sept. 29, down about 7.2% from the end of August.

Bae Jeong-cheol bjc@hankyung.com