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Stronger demand for Korean bonds and foreign capital influx expected
By Anna J. Park
The domestic bond market is anticipating the potential influx of a massive amount of foreign capital, as the global index provider FTSE Russell is slated to announce whether Korea will be included in the FTSE World Government Bond Index (WGBI) in a semi-annual report due in March.
According to the Ministry of Economy and Finance, Korea made it onto the watch list of the global market benchmarks provider late last September. In its Fixed Income Country Classification Announcement issued on Sept. 29, FTSE Russell added Korea to the watch list for potential inclusion in the FTSE WGBI the following year. Back then, the global market index firm favorably assessed Korean financial authorities for proposing several new initiatives to improve the accessibility of the domestic capital market for investors and enhance capital market structures.
If Korea succeeds in being included in the WGBI in March, market experts expect Korean bonds will constitute about 2 percent of the index, according to a study by the Korea Capital Market Institute (KCMI). That means a maximum of $60 billion worth of foreign capital could flow into Korea due to a surge in global demand for won-denominated bonds. Given that such money usually flows into local markets 12 to 18 months following inclusion, an influx of between $2.8 billion to $5 billion a month on average is expected during the period. The KCMI study also expects the interest rate on won-denominated bonds maturing in five years to fall by 25 to 70 basis points.
"If Korea is added to the global bond index, more long-term capital is expected to flow into the country," said You Seung-min, a chief strategist at Samsung Securities. "That would boost the market's stability as well as demand for won-denominated bonds."
Fixed-income analyst Kim Myung-sil from Hi Investment echoed a similar view.
"The average duration on the WGBI stands at 9.6 years, while foreign investors' average holding duration of Korean bonds is 7.1 years," Kim said. "Foreign investors' investment duration in won-denominated bonds is expected to become longer once Korea is included in the WGBI."
Currently, the WGBI includes bonds issued by 23 countries, such as the U.S., U.K., Japan and China, and about $2.5 trillion worth of global funds track the index.
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