As heightened uncertainties towards global monetary policy have led to rising bond yields in major economies, foreigners have resumed net selling in the Korean futures bond market. However, noting their steady net buying in the spot market, we believe it is unnecessary to be concerned about possible foreign capital defection from the Korean bond market at this juncture.

▶Foreign investors’ bond investment trends

Balance: Last week (Oct 10~14), around W1tn worth of foreign-held won-denominated bonds matured, while foreigners net bought around W800bn worth of KTBs, leading to net redemptions of W200bn. As a result, foreign-held won-denominated bond holdings decreased to W93.6tn. (Of note, the difference between the net investment amount and actual changes is attributable to RP transactions.)

Trading: Last week, foreigners net bought W700bn worth of 1yr (and shorter) MSBs in an attempt to replace their bonds with newer ones (of the same duration). As foreigners’ demand for 3yr (and longer) maturities remained solid, their duration expanded further.

KTB futures: Foreign investors net sold roughly 30,000 3yr KTB futures contracts and 6,229 10yr KTB futures contracts. Their open interest for 3yr and 10yr KTB futures fell below previous lows, indicating that foreigners have already offloaded a large amount of their KTB futures contracts.

▶Implications

In response to the recent rise in global bond yields (on (i) fears that the ECB will taper and (ii) an upturn in oil prices), foreigners resumed selling KTB futures contracts last week. In particular, with open interest for 3yr and 10yr KTB futures contracts having fallen below their previous lows, foreigners appear to have considerably reduced their KTB futures positions.
In contrast to their selling spree observed in the KTB futures market, foreigners remained solid buyers in the KTB spot market. While they sold 2yr (and shorter) KTBs last week, foreigners considerably increased their mid- and long-term KTB holdings (buying centered on the 5yr KTB benchmark). As a result, the duration of foreign-held won-denominated bonds expanded to 3.9 years.

Despite the recent rapid decline in foreigners’ open interest in the futures market, it appears unnecessary at this juncture to be concerned about possible foreign capital defection from the Korean bond market (given solid foreign buying in the KTB spot market). But, foreign buying in the spot market is unlikely to accelerate—won-denominated bonds have been losing their carry merit due to rising yields in major economies. For now, we predict that foreign-held won-denominated bond holdings will remain range bound, with foreigners switching to long-term bonds.  

Source : NH Investment & Securities / Seungwon Kang(sw.kang@nhqv.com)