Foreign capital, leaving Korean stock futures, flows into the bond market

Last month, foreign investors recorded a net outflow totaling 0.213 billion from both the Korean stock and bond markets, maintaining a selling stance for three consecutive months. However, compared with the unusually large-scale capital outflows recorded in March, the scale of outflows has eased somewhat.

According to the “International Finance · Foreign Exchange Market Trends” released by the Bank of Korea (the central bank) on the 15th, foreign securities investment funds in April showed a net outflow. A net outflow means that more foreign funds withdrew from Korea’s financial markets than new funds flowed in. Foreign funds have been in net outflow for three consecutive months since February, but in terms of scale, this figure has dropped sharply from 7.76 billion in February and 36.55 billion in March. Given that the March figure represented the largest monthly net outflow in history, this suggests that the intense unease in April has been partly alleviated.

By asset class, capital outflows from the stock market are still continuing. In April, foreign stock funds recorded net outflows of 0.268 billion, marking four consecutive months of net outflow since January. The total amount of foreign funds that have flowed out from the stock market so far this year alone has reached 46.01 billion. The Bank of Korea explained that due to geopolitical tensions surrounding the Middle East situation, investors remain cautious about risk assets. However, as market sentiment recovered after the United States and Iran reached a ceasefire agreement, the magnitude of stock-fund outflows—set at the largest level in history in March—narrowed noticeably in April.

In contrast, foreign funds flowed back into the bond market. In April, bond funds recorded a net inflow of 0.055 billion, reversing the 6.77 billion net outflow in March within just one month. Analysts believe this is largely because expectations that Korean government bonds will be included in the World Government Bond Index have increased attention on them as a medium- to long-term investment target. The World Government Bond Index is a representative benchmark index for global large-scale bond fund investment, so as inclusion expectations rise, demand for buying Korean government bonds in advance may increase. Unlike the funds that are flowing out of the stock market, funds that emphasize stability have partially flowed into the bond market.

Indicators that reflect market risk and the exchange rate trend remained relatively steady. Based on the credit default swap (CDS) spread—used to reflect the credit risk of Korean government bonds, taking the 5-year foreign exchange reserve fund bonds as the reference—the April average was 31 basis points, up 1 basis point from 30 basis points in the previous month. A basis point is the unit used to represent changes in interest rates or risk levels; 1 basis point equals 0.01 percentage points. In the same period, the average daily fluctuation range and volatility of the won versus the U.S. dollar were 8.9 won and 0.59%, respectively, down from 11.4 won and 0.76% in the previous month. Although foreign funds remain in net outflow, the overall level of unease in the financial markets has eased compared with March. In the future, this trend may lead to divergence between the stock and bond markets as external geopolitical variables, global interest rate directions, and expectations of Korean government bonds being included in international indices jointly take effect.