Risk of capital outflow is unlikely

The risk of capital outflows from Korea’s debt market after the United States raises interest rates is exaggerated as the majority of foreign investors are long-term funds, the Finance Ministry’s treasury bureau chief said.

Global central banks accounted for 46 percent of overseas funds in Korea’s local debt market last month, and their holdings may rise next year, said Lee Won-sik, director general for the treasury bureau, in an interview at the ministry on Sept. 26. South Africa’s monetary authority recently purchased won-denominated government debt and another new central bank is also showing interest, Lee said, declining to give further details.

“We’re not worried about outflows even if yields fall further on an additional rate cut by the Bank of Korea, again narrowing the yield differential with the U.S.,” Lee said. “Two-thirds of overseas investors buying won debt are long-term funds. Still, we do have contingency plans ready in case market volatility increases as the Fed’s monetary policy shifts.”

The yield gap between Korea’s 10-year bonds and U.S. Treasury’s with similar maturity narrowed to 39 basis points on Sept. 26.

Korea’s three-year bond yield fell to a record-low last week as Finance Minister Choi Kyung-hwan said earlier the nation has sufficient policy room to support growth, boosting speculation the central bank will lower borrowing costs again this year.

Bank of Korea Governor Lee Ju-yeol said in a Sept. 12 press briefing after holding the seven-day repurchase rate at 2.25 percent that cutting it too much can cause currency flight.

The treasury bureau may temporarily reduce monthly debt issuance or adjust sales volume between short- and long-tenor notes should bond market swings rise as the U.S. Federal Reserve starts raising interest rates next year, Lee said. Global funds increased holdings of won-denominated debt by 3 trillion won ($2.9 billion) this year as of the end of August, the Financial Supervisory Service reported Sept. 5. U.S. investors are the biggest holders of outstanding local debt. Bloomberg