South Korea's government bonds attracted 41.2 trillion won in net foreign purchases from end of March through the 9th, following the start of World Government Bond Index (WGBI) inclusion in April, according to the Ministry of Economy and Finance and bond market data released on the 10th. The inflows averaged approximately 10 trillion won monthly, driven primarily by passive funds tracking the index, with Japanese investors contributing around 3 trillion won per month. Despite the substantial capital inflows, Korean government bond yields rose during the period—3-year yields increased about 20 basis points and 10-year yields climbed 34 basis points—as Middle East conflict and interest rate hike concerns overshadowed the expected stabilizing effect of foreign demand.
Foreign Investors Purchase 41.2 Trillion Won in Korean Bonds Since March
Foreign investors net purchased 41.2 trillion won (settlement basis) of Korean government bonds from end of March, when the WGBI inclusion schedule was confirmed, through the 9th, according to the Ministry of Economy and Finance. Considering that passive fund capital tracking the index is executed from the end of the previous month, a significant portion of funds corresponding to July inclusion had already flowed in by end of June.
Hwang Soon-kwan, Director of the Treasury Bureau at the Ministry of Economy and Finance, stated in a phone call with Yonhap News that "passive funds centered on Japanese investors have steadily flowed in since the start of WGBI inclusion, supporting stability in the government bond market." He added that "Japanese investors in particular have been flowing in at a level of about 3 trillion won per month, with their holdings increasing more than tenfold."
The WGBI is one of the world's three major bond indices, and inclusion results in funds from global pension funds tracking the index flowing into the government bond market. Foreign capital inflows lead to declining government bond yields and won currency stability, affecting not only the government's funding costs but also corporate and household loan rates.
Bond Yields Rise Despite Foreign Inflows Amid Middle East Tensions
Since WGBI inclusion began, 3-year government bond yields rose approximately 20 basis points, while 10-year yields increased 34 basis points. In bond markets, rising yields typically signify declining bond prices (weakness). This contradicted initial expectations that large-scale foreign buying would lead to falling yields (bond strength).
A bond manager at a securities firm stated that "foreign demand for government bonds due to WGBI inclusion feels below expectations," adding that "government bond yields rose steeply as the unexpected Middle East war and high inflation concerns changed the Bank of Korea's monetary policy direction."
Hwang noted that "active funds are taking a wait-and-see approach in a highly volatile global market despite attractive yield levels, but as domestic and foreign financial markets stabilize with the U.S.-Iran ceasefire agreement, we expect active fund inflows to gain momentum in the second half." He explained that "the government plans to actively resolve difficulties while communicating with investors for smooth capital inflows."
In bond markets, the prevailing view is that investor sentiment will revive when inflation peaks are confirmed, U.S. Treasury yields stabilize, and the outline becomes clear regarding how far the Bank of Korea will raise its base rate. Park Sang-hyun, researcher at iM Securities, stated that "what must be noted above all is the U.S. Treasury yield level," adding that "the current U.S. 10-year Treasury yield level approaching the highest point since the U.S.-Iran war is burdensome from a financial market standpoint."
Japan's GPIF Confirms Korean Bond Purchases in March Portfolio
Foreign demand for Korean bonds is expected to remain steady amid uncertain domestic and international conditions. Japan's Government Pension Investment Fund (GPIF) confirmed purchases of Korean government bonds in its recently disclosed portfolio as of end of March. GPIF purchased 63 Korean government bond issues out of 10,039 total overseas bonds, with purchase volume at approximately 1.96 trillion won when converted to won. GPIF is Japan's national pension and is considered the flagship of passive funds tracking indices.
Kim Ji-man, researcher at Samsung Securities, stated that "Korean government bonds are scheduled to be finally included at 1.75% in the WGBI benchmark and 2.18% in the WGBI index excluding Japan and China by November, and upon completion of inclusion, GPIF funds alone are estimated to result in net inflows of about 16 trillion won." He added that "as of July, approximately 8 trillion won, half of that amount, can be seen as having already flowed in."
Kim added that "the reason the bond market does not feel this despite smooth inclusion is that monetary policy uncertainty is high and the government also has an expansionary fiscal stance, so WGBI supply and demand alone is insufficient to stabilize yields."
Jang Bo-sung, Director of the Macrofinance Office at the Korea Capital Market Institute, stated that "it is a relatively smooth situation even as global financial markets take a wait-and-see approach with the Middle East war breaking out just before inclusion." He noted that "foreign funds are coming in centered on short-term issues rather than ultra-long-term issues, through which we can see that investors are taking a wait-and-see approach to some extent."
He stated that "considering that passive fund capital typically comes in matching duration and maturity, there is room for additional inflows (into ultra-long-term issues, etc.)," adding that "mitigation of global financial market volatility must be prioritized."
FAQ
What is South Korea's WGBI inclusion and when did it start?
South Korea's inclusion in the World Government Bond Index (WGBI) began in April. The WGBI is one of the world's three major bond indices, and inclusion results in funds from global pension funds tracking the index flowing into the Korean government bond market. Korean government bonds are scheduled to be finally included at 1.75% in the WGBI benchmark by November.
How much foreign investment has flowed into Korean bonds since WGBI inclusion?
Foreign investors net purchased 41.2 trillion won of Korean government bonds from end of March through the 9th, according to the Ministry of Economy and Finance. This represents an average of approximately 10 trillion won in monthly foreign bond fund inflows, with Japanese investors contributing around 3 trillion won per month.
Why did Korean bond yields rise despite foreign investment inflows?
Korean government bond yields rose despite foreign inflows due to Middle East conflict and interest rate hike concerns. Since WGBI inclusion began, 3-year government bond yields increased approximately 20 basis points and 10-year yields rose 34 basis points. Bond market participants attribute this to the unexpected Middle East war and high inflation concerns changing the Bank of Korea's monetary policy direction, overshadowing the stabilizing effect of foreign demand.
