Investment flowing to bonds in a time of uncertainty

A screen in Hana Bank’s trading room in central Seoul shows the Kospi closing at 2,340.27 points on Wednesday, down 10.34 points, or 0.44 percent, from the previous trading day.

Investors are fleeing stocks for bonds as they seek safe havens in midst of economic uncertainty.

Foreign investors held a record 229.35 trillion won ($176 billion) of bonds in June, up 1.6 percent from May, according to the Korea Financial Investment Association (KOFIA) on Monday. They net purchased 11.4 trillion won of bonds over the counter in the same month, driven by high interest rates and the won weakening against the dollar.

While bonds lose value as rates rise, newly purchased bonds have higher coupons. A well structured bond portfolio can generate strong income in a higher-rate environment.

Foreign investors net purchased 7.3 trillion won of the government bonds, 2.6 trillion won of monetary stabilization bonds and 1.2 trillion won in bank bonds.

"Domestic bond rate rose in a big gap from Bank of Korea's projected 'big step' in July and the U.S. Fed's 'giant step'," KOFIA said in a statement.

The Bank of Korea raised the rate by a quarter percentage point in May, the fifth in a round of monetary tightening that began last year. The monetary policy board is projected to increase rates by a historic 50 basis points to 2.25 percent at the Wednesday meeting, according to Reuters poll Monday.

Bank of Korea's central banker has repeatedly said that the current focus is inflation, which was 6 percent in June. That is the highest since the 6.8 percent jump in November 1988, when Korea was in the midst of the 1997 Asian financial crisis.

The yield for three-year government bond was 3.324 Monday, and the 10-year was yielding 3.385 percent.

Bond issuance declined 5.8 percent on month to 71.4 trillion won in June. The total balance for the issued bonds stood at 2,560.3 trillion won.

Preference for bonds over stocks was also evident among retail investors.

They net purchased 5.67 trillion won of bonds in the over-the-counter bond market this year through last Thursday, according to the KOFIA. It was 2.69 trillion-won in the same period last year.

Net purchases of Kospi stocks by retail investors plunged 64 percent in the same period to 21.18 trillion won so far this year.

Shares of Samsung Electronics are down more than 20 percent this year, while those of Naver are down more than 30 percent.

BY JIN MIN-JI [jin.minji@joongang.co.kr]