After being included in the global government bond index, South Korea's government bond market has seen active buying by foreign investors and strong capital inflows.

After China’s government bonds were included in the Global Bond Index, both foreign purchases and holdings increased within a month, leading to capital inflow effects in the domestic bond market.

According to information from the government and financial investment industry sources, from the start of the inclusion process on March 30 to April 27, the net purchase of Korean government bonds by foreigners calculated based on trading volume was 10 trillion won, and based on settlement volume was 7.9 trillion won. The Global Bond Index is a representative index used as a benchmark by major global bond investors, so simply being included in this index is considered to have expanded channels for overseas funds to enter the domestic bond market. The actual net purchase volume gradually expanded, reaching 4.4 trillion won by April 1, 7.7 trillion won by April 13, and 8.5 trillion won by April 21, showing a continuous inflow trend.

Foreign holdings also resumed an increasing trend. According to statistics from Infomax, the balance of Korean government bonds held by foreigners increased from 297.1636 trillion won on March 30 to 306.7434 trillion won on April 29, a 3.3% increase. Previously, on March 20, holdings temporarily decreased to 295.5004 trillion won, but with sustained buying after index inclusion, the decline was recovered. The increase in holdings can be interpreted as foreign investment funds taking root in the market, rather than just short-term trading.

In terms of maturity, foreigners evenly bought medium- and long-term bonds, especially showing the greatest interest in 5-year bonds. According to analysis by Shinhan Investment Corp., from March 31 to April 29, foreigners net bought 3.56 trillion won worth of 5-year bonds. Next were 10-year bonds at 1.89 trillion won, 30-year bonds at 1.8 trillion won, 2-year bonds at 1.69 trillion won, 20-year bonds at 1.3 trillion won, and 3-year bonds at 740 billion won. The proportion of long-term bonds also increased, indicating that the inflow of funds might stay in the market for a relatively longer period. Because the longer the bond maturity, the lower the likelihood that investment funds will flow out in the short term.

However, market evaluations remain cautious. Initially, it was expected that the effect of including the Global Bond Index would bring in passive funds (funds that fully track the index) of about $50 billion to $60 billion (roughly 74 trillion to 89 trillion won) within the year. Based on a simple calculation over the eight months until November, an average monthly inflow of 8 trillion to 9 trillion won was expected. From this standard, the net purchase of 10 trillion won in April is roughly within expectations, but most analyses believe it did not significantly exceed expectations. In particular, some analysts pointed out that foreign funds have been flowing into the domestic bond market since last year, so it is difficult to attribute this increase solely to the effect of the Global Bond Index.

Market observations also suggest that future capital inflow speeds may accelerate further. Typically, funds related to the Global Bond Index tend to flow in heavily at the end of the year and the beginning of the year, and Korea’s weight in the index will be further increased in May. Huang Shunhuan, director of the Treasury Bureau of the Planning and Finance Ministry, also stated at the fifth “Periodic Review and Investment Attraction Promotion Group for the Global Bond Index” meeting held at the government Seoul building on April 29 that capital inflows might become formalized starting this week. The securities industry mentioned that Japanese funds and others might adjust their investment timing due to interest rate uncertainties, and there is potential for further inflows after June. Such trends could lead foreign funds to strengthen medium- and long-term investment characteristics rather than short-term arbitrage, thereby possibly further enhancing the stability and external credibility of the domestic bond market.