Foreign Retail Investors Also Swept Up Bonds Instead of Stocks

Net Purchase of Over 770 Billion KRW in US Bonds This Year
Expectations for the Final Stage of Interest Rate Hikes... Also Buying US Investment Grade Corporate Bond ETFs

[Asia Economy Reporter Kwon Jaehee] As expectations grow that the US interest rate hike cycle is nearing its end, Seohak Gaemi investors have shifted their focus from stocks to bonds. Although the US Federal Reserve (Fed) has hinted at additional rate hikes, the market sentiment is that these have already been priced in.

According to the Korea Securities Depository, the net purchase amount of US bonds by Seohak Gaemi investors from the beginning of this year until February 13 reached $608.51 million (approximately 772.5 billion KRW). This is nearly seven times higher compared to December last year ($85.93 million). In 2023, the net purchase amount of US bonds by domestic investors was $3.56209 billion (about 4.5203 trillion KRW), which represents a 282% increase compared to $930.40 million in 2021. This figure refers to direct and trust investments, separate from bond ETFs listed on the US stock market.

The proportion of US stocks held by Seohak Gaemi investors appears to be decreasing. Last year, the net purchase amount of US stocks by Seohak Gaemi investors was $12.05386 billion (approximately 15.3023 trillion KRW), down about 40% from $20.79182 billion (approximately 26.3952 trillion KRW) in 2021. The decline was largely due to the US stock market's bearish trend amid reduced liquidity caused by the US's aggressive tightening policy. Typically, during liquidity-driven markets, bond trading decreases while stock trading increases; conversely, when liquidity contracts due to quantitative tightening, bond trading becomes more active than stock trading.

Indirect investment in bonds through ETFs is also on the rise. In the past month (January 14 to February 13), the most net-purchased item by Seohak Gaemi investors was the iShares iBoxx USD Investment Grade Corporate Bond ETF (ISHARES IBOXX USD INVESTMENT GRADE CORPORATE BOND ETF), with purchases totaling $178.87 million (approximately 227 billion KRW). This product diversifies investments across more than 2,000 US investment-grade corporate bonds. It invests in companies such as Apple, Goldman Sachs, and Microsoft, with about 40% of its portfolio composed of A-rated or higher corporate bonds. It is managed by BlackRock, the world's largest asset management firm. The average maturity of this product is 8.29 years. It is interpreted that investors chose this long-maturity bond product to maximize returns.

Next, Seohak Gaemi investors purchased $52.08 million (approximately 66.1 billion KRW) worth of the ETF tracking US corporate bonds rated below investment grade or junk status (ISHARES IBOXX USD HIGH YIELD CORPORATE BOND ETF), ranking sixth among the top net purchases. High-yield bonds target corporate bonds with credit ratings of BB+ or lower; while principal is not guaranteed and there is a risk of default on principal and interest payments, the interest rates are higher. As the consensus grows that the interest rate hikes are nearing their end, investors seem willing to take on high-risk products. Park Seokjung, a researcher at Shinhan Investment Corp., analyzed, "From a medium-term perspective, considering that liquidity trends lead inflation and the economy, bonds are advantageous in developed countries."