Foreigners return to Korean debt market; Korea on course to join WGBI

Foreigners scooped up South Korean government bonds in January despite the country’s ongoing political upheavals, betting big on the country’s central bank’s rate cuts ahead.

Amid signs of recovery in debt investors' sentiment, the Korean government will do its utmost to restore investor confidence in the country’s financial market, said Korea’s Acting President Choi Sang-mok during his meeting with overseas investment bank officials on Thursday.

Foreign investors net bought 1.8 trillion won ($1.2 billion) worth of Korean government bonds in January, snapping the losing streak of foreign Korean government debt holdings, showed data from Korea’s Ministry of Economy and Finance on Thursday.

Foreign investors’ holdings of Korean treasuries steadily fell from 241.9 trillion won in October last year to 241.6 trillion won in November and 238.7 trillion won in December ahead of year-end book closures.  

They especially turned bearish about Korean debts in the last month of last year when Asia’s fourth-largest economy was embroiled in the turmoil caused by the short-lived martial law declaration of President Yoon Suk Yeol and his subsequent impeachment.

Despite the ensuing political chaos, foreign holdings of Korean government bonds bounced back to 240.7 trillion won last month.

Their appetite for Korean treasuries has been revived as the Bank of Korea is expected to cut its policy rate to shore up the country's economy, which is set to remain lackluster through this year, market analysts said. 

SIGNS OF RECOVERY IN INVESTOR SENTIMENT

On the same day, the country’s Acting President Choi, who doubles as deputy prime minister for economic affairs and the finance minister, reassured foreign investors that the Korean financial market remains resilient during his meeting with foreign IB officials.

Fitch Ratings’ confirmation of Korea’s sovereign credit rating at AA- with Stable Outlook last week indicates the international community’s confidence in the country’s effective and democratic risk management against political volatility, Choi said at the meeting.

“I expect foreign investors’ concerns about Korea’s credit rating will significantly diminish,” added Choi.

He also assured foreign investors that the Korean government will continue its revamping of the country’s capital market to ensure the seamless inclusion of Korean government bonds in the FTSE Russell’s World Government Bond Index (WGBI) in November.

“We will mend related systems, such as tax exemption for foreign investors and the Korean treasuries investment process, to meet global standards,” said Choi.

Last October, FTSE, the global index provider, announced its decision to add Korean government bonds to the WGBI two years after it placed the country on the Watch List in September 2022.  

Following the WGBI inclusion, effective from November of this year, Korea is expected to enjoy $66 billion in bond inflows as some $3 trillion of funds worldwide were estimated to track the WGBI, analysts said.

The WGBI is among the world’s top three indexes along with the JPMorgan Government Bond Index-Emerging Markets Index and the Bloomberg Barclays Global Aggregate Index. Those indexes are traditionally the most tracked by long-term investors.

Foreign investors’ holdings of Korean government bonds are forecast to account for 27% of the total around the end of 2026, up from 20.6% last year, the Korean finance ministry said.

Choi became Korea's interim leader following the impeachment and suspension of duties of Acting President Han Duck-soo in Parliament.

Write to Kwang-Sik Lee and Ik-Hwan Kim at bumeran@hankyung.com

Sookyung Seo edited this article.