Expectations for a rate cut in South Korea and uncertainties over tariff policies from the Trump administration have led foreign investors to purchase a large amount of our country's Government Bonds futures. Last month, the net purchasing volume by foreigners recorded the highest level since related statistics began being compiled. The market believes that the buying pressure from foreigners in Government Bonds futures will continue as there is a high possibility of a prolonged rate cut cycle for the time being.
Government Bonds futures are derivative products in which investors agree to buy and sell Government Bonds at a predetermined price at a specific point in time. If a decline in Government Bond interest rates is expected (the price of Government Bonds rises), investors will buy Government Bonds futures, and if an increase in interest rates is anticipated (the price falls), they will sell Government Bonds futures. The fact that foreigners net purchased Government Bonds futures indicates that there were more investors expecting a decline in interest rates.
◇ Foreigners' Government Bonds futures 'shopping spree'... net purchase of 3-year and 10-year bonds hits 'all-time high'
According to the Ministry of Economy and Finance on the 14th, last month, foreigners net purchased 214,313 contracts of 3-year Government Bonds futures. While financial investment institutions (net selling 106,549 contracts), investment trusts (net selling 49,509 contracts), pension funds (net selling 20,347 contracts), and banks (net selling 31,620 contracts) all sold futures, foreigners alone engaged in 'shopping spree.'
This is the highest monthly figure since January 2016, when the Ministry of Economy and Finance began compiling related statistics. Compared to the previous high in June of last year (net purchase of 146,698 contracts), transaction volume has increased by more than 45%. With trading volume surging, last month’s net purchase transaction amount also surpassed 23 trillion won, setting a new all-time high. The transaction amount is calculated by multiplying the futures price (percent) determined in real-time in the market by the contract unit (100 million won) and the total transaction volume.
When viewed on a daily basis, the buying pressure from foreigners in Government Bonds futures is even more pronounced. Last month, foreigners continued to net purchase daily, except for just four trading days (14th, 22nd, 23rd, 24th). On the 4th, when the impeachment of former President Yoon Suk-yeol was referenced, they net purchased 42,353 contracts (4.5 trillion won), setting a new record. Considering that the daily net purchasing volume since the beginning of the year has generally remained around 10,000 contracts and the value around 1 trillion won, this represents an unusual surge.
The trend of net purchasing is also evident in 10-year Government Bonds futures, which reflect long-term interest rates. Last month, foreigners net purchased 102,523 contracts (12.3 trillion won), marking an all-time high for that category. On a daily basis, net buying continued on all trading days except for three (8th, 9th, 11th), and on the 4th, they net purchased 17,241 contracts (2.07 trillion won), setting a new daily record.
The purchasing pressure from foreigners has also been reflected in the prices of Government Bonds futures. According to the Korea Exchange (KRX) information data system, the closing price of 3-year Government Bonds futures (June expiry) rose from 106.74 on March 26 to 107.86 at the end of last month. As of the 12th, it slightly decreased to close at 107.66.
◇ Weak growth in Korea and U.S. capital outflows enhance the attractiveness of Government Bonds futures
The market indicates that the Bank of Korea (BOK) has hinted at the possibility of a rate cut, leading to an increase in foreigners’ 'betting on rate cuts.' Last month, the BOK's Monetary Policy Committee held the key interest rate steady at 2.75% but left the door open for a rate cut within three months, raising expectations for a cut in May. Bank of Korea Governor Lee Chang-yong also recently remarked in Milan during the Asian Development Bank (ADB) annual meeting, saying, 'Do not doubt a rate cut.'
The announcement of a 0.2% decrease in real Gross Domestic Product (GDP) for the first quarter, which was released on the 23rd, also fueled expectations for a rate cut. This figure is 0.4 percentage points lower than the BOK's earlier projection of a 0.2% growth rate for the first quarter made in February. Following this announcement, overseas investment banks (IBs) have even forecasted that the annual growth rate for South Korea could tumble to around 0% this year.
A Bank of Korea official said, 'As the first-quarter growth rate came out poorly, concerns over economic slowdown have expanded in the market,' adding, 'Expectations for a cut in the key interest rate have grown, which seems to have intensified foreign purchasing pressure on Government Bonds futures.' Moon Hong-cheol, a researcher at DB Financial Investment, also noted, 'In a trend of low economic growth rates, there is an increase in the buying of Government Bonds futures that bet on falling interest rates.'
Some argue that global funds that have moved away from U.S. assets due to uncertainties related to the Trump administration's tariff policies have redirected toward the South Korean Government Bonds futures market. According to the U.S. Treasury, on the 11th of last month (local time), the yield on 10-year U.S. government bonds closed at 4.48%, marking the highest level since February 20 of this year (4.50%). Since interest rates move in the opposite direction to bond prices, this implies that U.S. bonds were sold off significantly.
Joyoong Gu, a researcher at Shinyoung Securities, stated, 'As U.S. assets are being sold off, foreign funds have entered both South Korean Government Bonds in the spot and futures markets,' adding, 'Although the U.S. maintains a high-interest-rate trend, South Korea is keeping a rate cut trend, increasing the preference for won-denominated bond assets.' He mentioned, 'In the spot market, Chinese investors are showing interest, while hedge funds based in Singapore and Hong Kong are focusing on futures.'