Foreign investors sell Korean bonds as hedged yield advantage disappears

Foreign investors turned net sellers of Korean bonds in August for the first time in about 3 and a half years, industry data showed Sunday, as the yield advantage from currency-hedged investments declined.

Foreign investors sold a net 839.7 billion won ($624.8 million) worth of Korean bonds last month, marking their first monthly net selling since January 2023, according to data from investment banks and debt market sources.

They remained net buyers of 63.26 trillion won through Sept. 11, but the amount was down 35.2 percent from the same period the previous year.

Their Korean bond holdings also fell sharply, dropping by about 12.9 trillion won from a record 356.6 trillion won on July 24 to 343.6 trillion won on Sept. 2. It marked the largest decline over a comparable 27-trading-day period in the past five years.

The slowdown largely reflects 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 Sept. 10, making currency-hedged investments in short-term Korean bonds less attractive than comparable U.S. dollar assets.

Still, passive inflows tied to Korea's phased inclusion in the World Government Bond Index (WGBI) have helped cushion the selling pressure, with market watchers saying foreign net selling would have been greater without the WGBI-related inflows.

Yonhap