Geopolitical risks haven't hurt foreign appetite for South Korean bonds

South Korea has seen a stable flow of foreign investment into local government bonds this week, including from central banks, even as political tensions around North Korea persist, a finance ministry official said on Thursday. "There is a continued influx (into South Korean treasury bonds) from many central banks as they retain a stable outlook on South Korea's economic fundamentals and credit rating," Park Seong-dong, director general of the treasury bureau at the ministry told Reuters in an email interview.
South Korea's 10-year bond yields have gone from a low of 2.105 percent in June to a two-year high of 2.435 percent on September 28 amid wider geopolitical concerns about the Korean peninsula. Market participants say global funds offloaded trillions of won worth of bonds late last month over the concerns. However, foreign investors have returned as net buyers this week, with some central banks seen increasing their purchases of Korean Treasury Bonds (KTBs), according to Park.
"Overall, medium- to long-term funds (in local bond markets) are in a stable situation," Park said, adding that the ministry sees no immediate capital flight risks from the local bonds. At the end of the third quarter, foreign investors held about 100 trillion won ($88.28 billion), or 17 percent, of South Korea's outstanding treasury bonds, according to the ministry.
The yield on the benchmark 10-year bonds is currently 2.388 percent, data from the Korea Financial Investment Association shows. Fitch Ratings on Thursday reaffirmed South Korea's sovereign credit rating at AA-, its fourth highest, placing it above China's and Japan's ratings.
The ratings agency said although the current level of tensions is high, strains on the Korean peninsula are not new and have followed a predictable pattern of heightened and eased tensions in the past. Asked to comment on the issuance plans for the rest of the year, Park said the government may increase sales of 30-year bonds as it adjusts monthly allocation plans for November and December.