Korean bonds sought by foreign investors

Korean bonds issued by the government have become a popular investment tool for foreign investors as they search for safer assets amid the ongoing global financial turmoil.

The lingering debt crisis in the euro zone, including France and Italy, and the slower than expected economic recovery in major developed nations like the United States and Japan, have led investors to turn their backs on these markets and bet on Korea by purchasing Treasury bonds that mature in three, five, 10, and 20 years.

According to recent data by the Financial Supervisory Service and the Korea Financial Investment Association, foreign investors owned 17.8 percent, or 60.9 trillion won ($54 billion), of all Korean government bonds as of last December.

The record high figure is more than double that of three years ago, when only 7 percent, or 25.4 trillion won, was owned by overseas investors. The growth was largely led by investors from emerging countries like China (10.2 trillion won), Thailand (9.7 trillion won) and Malaysia (7.9 trillion won). “In international financial markets, investors are willing to invest in Asian bonds particularly Korean ones, rather than those of the European Union,” said Kwak Seok-joo, an associate from Woori Investment and Securities. “Korean government bonds are considered credible by a majority of overseas investors.”

Industry experts note that the reason why Korean bonds are gaining popularity steadily over the years is because of the country’s strong economic fundamentals, such as strong foreign reserves and a current account surplus.

Despite fluctuations in the global financial market ever since last summer, when Standard and Poor’s downgraded the credit rating of the U.S., the Korean economy has proved relatively reliable and less vulnerable to global uncertainties than was the case during the Asian financial crisis in the late 1990s and the global economic meltdown in 2007.

Meanwhile, demand for company bonds issued by Korean firms is also surging. Large companies issue bonds as they need large amounts of investment to expand their overseas businesses.

Samsung Electronics last week said that it will issue a total of $1 billion worth bonds with a five-year maturity term in the U.S. to help operate its semiconductor manufacturing facility in Austin, Texas.

“The volume of Korea’s bond market is the third-largest in Asia after Japan and China,” said an analyst at Tong Yang Securities. “Investing in Korean funds is considered efficient nowadays as Japanese bonds tend to have low interest rates and Chinese bonds are excessively regulated by the government.”

However, with the popularity of Korean bonds going up, there are concerns that their over-popularity at a time when the global financial market is fragile could pose a long-term threat to the Korean economy as foreigners will ask for early repayment, which was the case when the Asian financial crisis broke out. Back then, the Korean government didn’t have much foreign capital in the market and had to borrow money from the International Monetary Fund. Also, the larger injection of foreign capital into Korean bonds may strengthen the value of the won, which would hurt domestic exporters.

Aware of this, Minister of Strategy and Finance Bahk Jae-wan said earlier this month that “the government will work closely with the central banks of other countries to limit volatility in the capital market.”

An official from the Finance Ministry further explained that “major countries including China and Japan are interested in purchasing our bonds, and we will monitor the investment period and volume as a means of limiting volatility.”

By Lee Eun-joo [angie@joongang.co.kr]