Foreign investors offloaded about 10.4 trillion won ($7.4 billion) worth of Korean government bond futures in just three sessions last week, amid expectations that both Seoul and Washington will hold policy interest rates steady next month.
Data from Korea’s finance ministry showed on Monday that between Sept. 24 and 26, overseas investors sold a net 104,419 contracts in three-year Treasury futures, equivalent to 10.4 trillion won.
The sell-off marked one of the largest single-week retreats since the onset of the COVID-19 pandemic, with their bond sale on Sept. 24 alone ranking as the fifth-heaviest daily net sale on record.
Foreign investors’ recent pullback from Korea’s bond market comes in sharp contrast to August, when foreigners bought about 6 trillion won worth of bond futures.
Traders said a significant share of the proceeds from the sale of bond futures was translated into dollars, adding upward pressure on the dollar-won exchange rate, meaning the won’s weakness.
Bond yields have surged in response.
The three-year government bond yield climbed 3.4 basis points to 2.562% on Sept. 26, its highest level since April, while the 10-year yield jumped 5.8 basis points to 2.943%, touching a year-to-date peak.
US FED, BOK UNLIKELY TO MOVE TO CUT RATES SOON
Investors are increasingly betting that neither the US Federal Reserve nor the Bank of Korea will cut rates soon.
The US economy delivered an annualized 3.8% GDP expansion in the second quarter, reinforcing expectations that the Fed will be slow to cut its policy rates.
In Seoul, policymakers face mounting housing-market pressure.
Last week, BOK monetary policy board member Hwang Geon-il signaled that financial stability concerns are likely to weigh against any near-term easing, while the central bank’s latest financial stability report warned that property stabilization measures are failing to dampen surging home prices.
SENTIMENT HURT BY STALLED $350 BN US INVESTMENT FUND TALKS
Analysts said currency jitters have also added to the foreign bond futures sell-off.
Talks over a proposed $350 billion Korea-US investment fund have stalled, raising fears that the financing process could trigger bouts of dollar demand, exacerbating volatility in the Korean currency market.
The foreign exchange rate breached 1,410 won per dollar last week, reaching the Korean currency’s weakest level in four months.
“Foreign bond investors respond not just to forex rate expectations but also to currency market swings,” said Ahn Dong-hyun, economics professor at Seoul National University. “With negotiations over the $350 billion Korean investment fund clouded in uncertainty, volatility in the won is amplifying their retreat from Korean bonds.”
President Donald Trump reiterated that Korea’s $350 billion investment pledge under the bilateral trade accord must be paid “up front,” while Commerce Secretary Howard Lutnick has been urging Seoul to increase the amount.
Tensions escalated after Korean President Lee Jae Myung called for “commercially rational” tariff negotiations during a meeting in New York with US Treasury Secretary Scott Bessent.
Economists caution that US demands could strain Korea’s $416 billion in foreign reserves and unsettle financial markets, reviving memories of the 1997-98 Asian financial crisis.
By Ik-Hwan Kim
lovepen@hankyung.com
In-Soo Nam edited this article.
