Last month, improved investor sentiment significantly reduced the outflow of foreign capital from the stock market. Bond funds transitioned to net inflows following their inclusion in the World Government Bond Index (WGBI).
According to the Bank of Korea's report on international finance and foreign exchange trends released on May 15, foreign securities (stocks and bonds) saw a net outflow of $2.13 billion in April. This indicates that the amount of foreign investment leaving the South Korean securities market exceeded the amount entering.
Foreign capital had recorded a historic outflow of $36.55 billion last month, but as investor sentiment improved, the scale of outflows decreased significantly.
Foreign stock investments experienced a net outflow of $2.68 billion, marking the fourth consecutive month of outflows due to geopolitical risks in the Middle East. However, following a ceasefire agreement between the U.S. and Iran, investor sentiment showed some recovery, leading to a substantial reduction in outflows from the previous month’s $29.78 billion.
In contrast, bond funds saw a net inflow of $550 million, reversing from a net outflow of $6.77 billion the previous month. Despite low arbitrage incentives, the influx was driven by long-term government bond investments following WGBI inclusion. The net investment in government bonds with maturities of 1 to 30 years surged from $2.88 billion in March to $6.45 billion in April.
The credit default swap (CDS) premium for South Korean government bonds (based on the 5-year foreign exchange stabilization fund bonds) averaged 31 basis points (1 basis point = 0.01 percentage points) in April, down 1 basis point from the previous month’s 30 basis points, maintaining the same level. However, as the conflict in the Middle East continues, the short-term external borrowing spread rose from 14 basis points to 19 basis points, while the long-term spread increased from 37 basis points to 45 basis points.
Last month, the volatility of the won-dollar exchange rate decreased significantly compared to March. The average fluctuation and rate of change in April were 8.9 won and 0.59%, respectively, returning to February levels from the previous month’s 11.4 won and 0.76%.
The Bank of Korea explained, "The exchange rate fell to the 1,450 won level due to expectations of progress in U.S.-Iran peace negotiations and the strengthening of the yen, but the decline was limited by reduced expectations for U.S.-Iran peace and net selling of domestic stocks by foreigners."
* This article has been translated by AI.
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