Foreign investors favor Korean bonds over Korean stocks

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Foreign investors favor Korean bonds over Korean stocks

Foreigners are shifting from Korean stocks and scrambling to buy up won-denominated bonds due to their high yields.
According to Korea Exchange, foreign investors sold 17.5 trillion-won ($14.9 billion) of stocks Jan. 4 to June 30. During the same period, they net purchased 37.5 trillion won of bonds, buying 67.4-trillion-won worth and redeeming 29.9 trillion won. On a net basis, bond purchases were up 51.9 percent on year.   
Foreigners owned a record 188 trillion-won of won bonds as of June, 8.7 percent of the total.  
The increase in investment mostly flowed into government bonds. A total of 23.8 trillion won, or 63.3 percent, was used to purchase government bonds.  
Looking at maturities, foreign investors preferred bonds with one- and three-year maturities. A total of 36.6 trillion, of 54.2 percent of the total purchases, was used to buy these bonds. A total of 7 trillion won was used to purchase bonds with maturities of five years and above.
Although base rate increases — hinted by Bank of Korea Gov. Lee Ju-yeol last month — generally lowers the attractiveness of investing money in bonds, foreign investors have been moving differently.  
“Korea’s government bonds are popular because they have a higher yield than other countries’,” said Gong Dong-rak, an analyst at Daeshin Securities.  
Compared to other countries with a AA credit rating by Moody’s, Korean government bonds have a higher yield. The 10-year government bond had a 2.035 percent yield as of Tuesday, while Britain’s is paying 0.633 percent and Taiwan’s 0.42 percent. Both countries also have an AA rating.  
Countries rated AAA have an even lower yield. The U.S. 10-year government bond yields 1.418 percent and Australia’s 1.337 percent.  
Experts expect strong foreign buying to continue in the future.  
“Korea has high investment attractiveness because its government bonds have high interest rates and is known as a country with a current account surplus, less likely for the currency to suddenly lose value,” said Kim Hak-kyun, head of a research center at Shinyoung Securities.
Shin Hwan-jong, head of NH Securities & Investment’s Fixed Income, Currencies and Commodities (FICC) research center, agreed, saying that more foreign money could flow into Korea, buying more government bonds.  
Having many mid- to long-term investors is another plus. According to Financial Supervisory Service, 67 percent of the foreign investments into government bonds were from overseas central banks and sovereign wealth funds as of April. Such groups put in hefty amounts of money, planning their investments for the long term, serving as a sign that money will remain in Korea and not flow out quickly.

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