Foreigners net purchased $8.4 bn in Korean bonds in March after SVB failure

[Photo by MK DB]

Foreign investors have net purchased more than 11 trillion won ($8.4 billion) in South Korean bonds this month after the Silicon Valley Bank (SVB) fallout that raised hopes for the U.S. Federal Reserve to soften its interest rate hikes.

According to multiple industry sources on Thursday, offshore investors net bought 11.09 trillion won in won-denominated bonds between March 1 and 29. It is the largest monthly net buying after 12.08 trillion won in June last year.

Foreigners net purchased 7.5 trillion won in treasury bonds and 3.6 trillion won in monetary stabilization bonds.

The outstanding balance of foreigners’ won-denominated bonds reached 230 trillion won in July last year but the amount was reduced amid the U.S.’s monetary policy pressure and Legoland crisis in Korea.

Industry insiders note that the rise in foreign net buying of won-denominated bonds comes on improved incentives for arbitrage trading in the bonds.

More than 7 trillion won in the won-denominated bonds purchased by foreigners were short-term notes with less than one year maturity. Foreigners rushed to a net buying position after the third week in March after the SVB collapse.

Market insiders note that the net buying was driven by the expectation that the U.S. Fed will ease its monetary tightening amid a higher risk of systemic crisis in the banking sector following the SVB failure.

“The recent failures of the SVB and Credit Suisse eased concerns over further tightening policy by central banks, resulting in stronger net buying by foreigners,” said Cho Yong-ku, an analyst at Shinyoung Securities Co.

There, however, remains a risk.

Analysts note that although foreign investors have a high investment sentiment in Korean bonds, they may face a risk if the Korean central bank raises the benchmark rate that will affect the real estate market and household debt.