South Korean bonds see first foreign net selling since January 2023

Foreign investors became net sellers of South Korean bonds in August, marking the first such monthly net selling since January 2023. Industry data indicates a net sale of approximately 839.7 billion won (US$624.8 million).

This shift is attributed to the declining yield advantage of Korean bonds over U.S. assets once currency hedging is applied. The arbitrage spread, which stood at 68.3 basis points at the end of last year, fell to minus 30 basis points as of September 10. This change has made currency-hedged investments in short-term Korean bonds less attractive compared to U.S. dollar assets.

Total Korean bond holdings saw a significant drop, falling by about 12.9 trillion won from a record high in late July to 343.6 trillion won by early September. This represents the largest decline over a comparable 27-trading-day period in five years. However, passive inflows resulting from South Korea’s phased inclusion in the World Government Bond Index (WGBI) helped mitigate the selling pressure.