SEOUL, October 8 (AJP) — U.S. bond yields near multidecade highs are drawing South Korean investors seeking a safer alternative to volatile stocks, but the prospect of further price declines is tempering their appetite.
With 10-year U.S. Treasury yields around 5.3 percent, investors can secure income rarely available over the past two decades. The dilemma is whether to buy now or wait for yields to climb further, pushing bond prices lower.
Recent investment flows reflect that tension.
Korean residents’ net purchases of foreign debt securities reached a record $6.44 billion in August, more than five times July’s $1.24 billion, according to preliminary balance-of-payments data released Thursday by the Bank of Korea (BOK).
The central bank attributed the increase to improved investment appeal in overseas bond markets. Yet more recent settlement figures suggest investors have become more cautious.
Net purchases of U.S. government and corporate bonds through the Korea Securities Depository (KSD) fell 25.2 percent to $1.36 billion in September from $1.82 billion in August, according to its SEIBRO database. Gross purchases declined more sharply, falling 30.6 percent to $1.77 billion from $2.55 billion.
September nevertheless marked a third straight month of net buying. Korean investors turned net buyers of U.S. bonds with $889 million in July before purchases climbed to $1.82 billion in August and eased to $1.36 billion in September.
Buying continued into October, with net purchases totaling $433.2 million over Oct. 1–7.
The two datasets cover different markets and investor activity. The BOK measures residents’ investment in debt securities worldwide, while the KSD figures cited here capture U.S. bond transactions settled through the depository. September’s slowdown therefore offers an early indication of caution rather than confirmation that the broader overseas buying surge has reversed.
“The latest run in yields could have scared some and appetite for both Korean government bonds and U.S. Treasuries has declined,” said a bond trader who requested anonymity.
Short-term trading in shorter-dated bonds has accounted for a greater share of activity as long-term yields surged, the trader said.
Separate KSD data point to a similar preference for shorter-duration exposure. From Sept. 1 through 23, Korean investors net bought $241.9 million of the iShares 0-3 Month Treasury Bond ETF, or SGOV, making it their most heavily purchased overseas security during the period. Net purchases of the iShares 20+ Year Treasury Bond ETF, or TLT, totaled just $14.3 million. The ETF figures are separate from the U.S. bond settlement data above.
Higher yields improve the income available to new buyers, but they do not shield investors from losses if market rates keep rising. Longer-dated bonds are particularly sensitive to such moves, while exchange-rate changes also affect the won value of unhedged overseas investments.
Even August’s record buying did not erase the weakness earlier in the year. Residents’ net purchases of overseas debt totaled $3.25 billion in January–August, far below $21.74 billion a year earlier.
The pressure is also being felt in Korea’s bond market.
Foreign investors reduced their Korean debt holdings by $4.38 billion in August after adding $2.19 billion in July. The BOK cited weaker arbitrage incentives, or reduced returns from exploiting differences between markets. Foreign debt investment nevertheless remained positive at $15.34 billion for the first eight months.
Rising market rates are meanwhile increasing the burden on borrowers. Mortgage News Daily’s index for top-tier U.S. 30-year fixed-rate mortgages reached 7.59 percent on Oct. 7, illustrating how the bond selloff is feeding through to household financing costs.
In Korea, the government announced on Oct. 2 that it would cut planned government bond issuance for the month by about 5 trillion won and consider further reductions or emergency buybacks if necessary. It also warned that persistently high rates could increase refinancing pressure on companies with weaker credit ratings.
September’s balance-of-payments figures will show whether the broader shift into overseas bonds endured. For now, the attraction of yields above 5 percent is competing with investors’ reluctance to buy before the selloff has run its course.
AJP Takeaways
- Korean investors remained net buyers of U.S. bonds for a third straight month in September, although net purchases fell 25.2 percent from August’s level.
- Short-duration exposure drew stronger interest as long-term yields surged, with ultra-short Treasury ETF SGOV attracting far more net buying than long-duration TLT in September.
- August’s record $6.44 billion in overseas debt investment did not reverse the broader weakness, with January–August purchases remaining far below a year earlier.
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