Foreign investors turn net sellers of Korean bonds in Aug.

In August, foreign investors turned net sellers of Korean bonds for the first time in nearly three and a half years, according to industry data released on Sunday. The reason behind this shift was the decline in the yield advantage from currency-hedged investments. In the month of August, foreign investors sold a net 839.7 billion won worth of Korean bonds, which was their first monthly net selling since January 2023. These figures were reported by investment banks and debt market sources.

Despite selling bonds in August, foreign investors still maintained a net buying position of 63.26 trillion won for the year up to September 11. However, this net buying position was down by 35.2 percent compared to the same period in the previous year. Additionally, foreign investors' holdings of Korean bonds fell sharply, decreasing by approximately 12.9 trillion won.

From a record high of 356.6 trillion won on July 24, their holdings dropped to 343.6 trillion won on September 2, marking the largest decline over a similar 27-trading-day period in the past five years.

The primary factor behind this decline was the erosion of arbitrage opportunities. Korean bonds had lost their yield advantage over U.S. assets after currency hedging. The arbitrage spread, which was at 68.3 basis points at the end of last year, had fallen to minus 30 basis points as of September 10, making the investment less attractive for foreign investors.