[ANALYST REPORT] Foreigners’ bond duration rises on buying of mid- and long-term bonds

Foreigners net sold 650 billion won (US$546 million) worth of Korean Treasury bonds in the spot market during the fourth week of June (June 20-24), net-selling for the first time in five weeks. Yet, as foreigners net sold mainly short-term monetary stabilization bonds (maturing in August) and net bought mid- and long-term maturities, their bond duration continued to increase.


▶Foreigners’ bond investment trends

Balance: Last week (June 20-24), around 150 billion won worth of foreign-held won-denominated bonds matured, whereas foreigners net sold 645.3 billion won worth of KTBs in the spot market. As a result, foreigners’ net redemptions amounted to 800 billion won and their won-denominated bond balance came to 95.3 trillion won. (The difference between the net investment amount and actual change is attributable to RP transactions.)

Trading: Last week, foreigners net sold 1 trillion won worth of 1yr (and shorter) MSBs maturing in August and net bought 520 billion won worth of 3~6yr maturities. By doing so, their bond duration continued to expand.

KTB futures: Last week, foreigners net sold 2,692 3-year KTB futures contracts and 3,318 10-year KTB futures contracts. With their open interest having hit an all-time high, foreigners had little desire to increase their KTB futures positions ahead of the Brexit referendum.


▶Foreigners switching to mid- and long-term maturities; favorable foreign demand-supply dynamics confirmed

Last week, for the first time in five weeks, foreigners net sold in the spot market. Looking more closely at foreigners’ trading activity: 1) their selling concentrated on MSBs set to mature in less than three months; and 2) they net bought 520 billion won worth of 3-6 year won-denominated bonds. As such, it appears that last week’s net selling was for replacement purposes.

Meanwhile, boding well for the Korean bond market is the fact that the portion of KTBs out of foreigners’ total bond holdings has been steadily on the rise. For example, foreign buying YTD has concentrated on KTBs and KTB is -- their KTB holdings as a portion of their total bonds his risen from 68 percent to 72 percent -- and their MSB portion has slipped from 33 percent to 26 percent. Such enhanced preference for KTBs suggests that despite KTB yields sliding below US TB yields, foreigners still view KTBs as being an attractive investment.


▶Implications

With KTB yields having fallen below their US counterparts, foreign capital defection fears have risen. However, recent trading in Korea has confirmed stable foreign demand for mid- and long-term won-denominated bonds, a fact we attribute to the stability of both won-denominated bonds and the won (vs. the dollar). In summary, at the moment, concerns of foreign capital defection (due to KTB yields falling below US TB yields) look overblown.

Source: NH Investment & Securities