Vice Finance Minister Shin Je-yoon on Wednesday said the inflow of foreign capital into the local bond market is a concern, projecting worries about yet another round of speculative capital inflow.

“Foreign investors have been upping their share of Korean bonds and it is a concern,” Shin said at a business forum.

Foreign investors in February raised their holdings of Korean bonds by the most since July last year.

Their net holding of local bonds rose by 1.8 trillion won ($1.6 billion) to 86 trillion won in February, according to the Financial Supervisory Service. The regulator attributed the rise to expectations for a stronger won and relatively stable growth in the coming months.

Shin has repeatedly warned of capital inflow into the bond market, saying it is more dangerous than a fast inflow into stocks. His logic is that bond investors are more risk-averse and therefore are more speculative, fast exiting on the slightest uncertainty from abroad.

The inflow into Korea’s bond market reflects growing appetite for safe assets as investors are facing external uncertainties from Europe and tension in the Middle East. Korea has been placing barriers on surging foreign capital feared to hurt the domestic economy such as a revival of a 14 percent tax on foreigner’s income from government bonds and a bank levy on short-term foreign currency loans.

Shin also said the ministry will maintain its current macroeconomic policies without expanding its budget to accommodate the slowing growth.

Separately, Finance Minister Bahk Jae-wan told a meeting of policymakers he is ready to take preemptive action against dangers ahead, including a further rise of oil prices and the ongoing Eurozone debt crisis.

“Though our economy sees continued improvement in employment and other major indicators, it is still difficult to let our guard down in the face of external risk factors such as high oil prices and the Eurozone fiscal crisis,” Bahk Jae-wan told a meeting with other policymakers.

“An economic slump comes without sounding an alarm and our response to the slump should be swift at all times,” he added.

By Cynthia J. Kim (cynthiak@heraldcorp.com)