Foreigners' Net Bond Purchases Surge Sharply... Impact of May Interest Rate Hike

Last month, as interest rates rose due to a monetary tightening stance, foreign investors' net bond purchases increased significantly.

The Korea Financial Investment Association announced the "May 2023 OTC Bond Market Trends" on the 9th. Last month, domestic interest rates rose despite the Federal Open Market Committee (FOMC) removing the additional tightening language along with a rate hike, which initially caused rates to fall. This was influenced by the Bank of Korea's Monetary Policy Committee maintaining the base rate but keeping the possibility of a rate hike open, thereby sustaining the tightening stance.

Last month, the bond issuance volume increased by 21 trillion KRW from the previous month to 97.7 trillion KRW, driven by increases in government bonds, special bonds, Monetary Stabilization Bonds, and financial bonds. The outstanding issuance balance rose by 37 trillion KRW due to net issuance of government bonds, special bonds, Monetary Stabilization Bonds, and financial bonds, reaching 2,698.4 trillion KRW.

Corporate bond issuance decreased by 2 trillion KRW from the previous month to 7.6 trillion KRW, affected by rising interest rates. ESG bond issuance recorded 6.278 trillion KRW, down by 41.2 billion KRW from the previous month, amid continued issuance demand from public institutions.

Last month, the corporate bond demand forecast amounted to 2.5 trillion KRW across 30 cases, an increase of 305 billion KRW compared to the same month last year. The total participation amount in demand forecasts was 10.002 trillion KRW, up by 4.266 trillion KRW from the same month last year, with a participation rate of 400.1%, increasing by 138.8 percentage points year-on-year. There was one case of non-subscription in the A-grade category, resulting in a non-subscription rate of 1.1%.

May's OTC bond trading volume rose by 18.1 trillion KRW from the previous month to 389.9 trillion KRW, influenced by rising bond yields. The average daily trading volume increased by 900 billion KRW from the previous month to 19.5 trillion KRW.

Last month, individuals showed investment demand in government bonds, other financial bonds (such as credit finance company bonds), and corporate bonds, resulting in net purchases of 3.1 trillion KRW.

Foreign investors, driven by expanded arbitrage incentives, net purchased a total of 17.4 trillion KRW, including 11.5 trillion KRW in government bonds and 5.3 trillion KRW in Monetary Stabilization Bonds, marking an approximately 90% increase from the previous month (924.8 billion KRW). They net purchased 11.525 trillion KRW in government bonds. As of the end of May, foreign investors' domestic bond holdings (reflecting matured repayments) increased by 11.9 trillion KRW from the end of the previous month to 238.7 trillion KRW.

As of the end of May, the yield on negotiable certificates of deposit (CDs) rose by 24 basis points (1bp = 0.01 percentage points) from the previous month to 3.76%, despite the Bank of Korea's Monetary Policy Committee maintaining the base rate at 3.50%, influenced by the issuance of 3-month CDs by commercial banks.