Seoul: Foreign investors turned net sellers of South Korean bonds in August for the first time in approximately 3 1/2 years, industry data showed Sunday, as the yield advantage from currency-hedged investments declined.
According to Yonhap News Agency, foreign investors sold a net 839.7 billion won (US$624.8 million) worth of Korean bonds last month, marking their first monthly net selling since January 2023. Despite this, they remained net buyers of 63.26 trillion won in the year through September 11, although the amount was down 35.2 percent from the same period a year earlier.
Their Korean bond holdings also experienced a significant drop, decreasing by about 12.9 trillion won from a record 356.6 trillion won on July 24 to 343.6 trillion won on September 2. This decline represents the largest over a comparable 27-trading-day period in the past five years.
The slowdown in investment activity is largely attributed to the erosion of arbitrage opportunities, as Korean bonds have lost their yield advantage over U.S. assets after currency hedging. The arbitrage spread fell from 68.3 basis points at the end of last year to minus 30 basis points as of September 10, making currency-hedged investments in short-term Korean bonds less attractive than comparable U.S. dollar assets.
Nevertheless, passive inflows tied to South Korea's phased inclusion in the World Government Bond Index (WGBI) have provided some cushion against the selling pressure. Market watchers suggest that foreign net selling would have been greater without the WGBI-related inflows.