Foreign investors have been withdrawing funds from the country's stock market for eight consecutive months. This is due to the expansion of trade uncertainty ahead of U.S. President Donald Trump’s reciprocal tariff imposition, which has dampened global investor sentiment.
According to the ‘International Financial and Foreign Exchange Market Trends’ released by the Bank of Korea on the 22nd, foreign stock investment outflows amounted to a net $1.16 billion in February. This indicates that the funds exiting the stock market exceeded the amount that flowed in.
Foreign stock investment has recorded net outflows for eight months since August last year ($1.85 billion net outflow). The Bank of Korea noted, “As global trade uncertainty expanded, the outflows continued,” while adding, “However, thanks to expectations for the semiconductor business, the scale of net outflows has decreased compared to the previous month.”
In contrast, bond funds saw a net inflow of $4.83 billion, maintaining a positive (+) streak for two consecutive months. The Bank of Korea explained that the expansion of arbitrage incentives led to the influx of reinvestment funds, alongside steady demand for long-term bonds.
Arbitrage incentives refer to the profits that can be obtained when foreigners borrow dollars, exchange them for won, and then invest in domestic bonds. The arbitrage incentives expanded from 15 basis points (1 basis point = 0.01 percentage point) in January to 31 basis points in February and 36 basis points in March.
The total foreign securities investment, combining stocks and bonds, showed a net inflow of $3.67 billion. This is the largest net inflow in ten months since May last year ($4.11 billion net inflow).
In March, the average fluctuation range and fluctuation rate (compared to the previous day) of the won-dollar exchange rate were 11.7 won and 0.81%, respectively. This represents a significant expansion compared to the previous month (4.3 won and 0.29% each). The Bank of Korea explained that “the won-dollar exchange rate expanded significantly due to the developments in the U.S. tariff policy.”
Last month, the credit default swap (CDS) premium for Korean government bonds (based on the 5-year foreign exchange stabilization fund bonds) averaged 33 basis points, increasing by 2 basis points from the previous month. The CDS premium rose from 34 basis points in November last year to 37 basis points in January this year but saw a significant drop in February. However, it reversed to an upward trend last month. The CDS premium is a fee paid in case the state defaults and the principal cannot be recovered, indicating that a lower number is better.