Foreigners Pile Into Korea Debt, Bucking Emerging Market Jitters

Foreign investors are piling billions of dollars into South Korean bonds as the local currency stabilizes and tensions with North Korea appear to wind down.

South Korea has turned out to be “the only bright spot” in the emerging debt market of Asia this year as more than $16 billion of foreign money has flown into it, according to Rohit Garg, a strategist at Bank of America Merrill Lynch in Singapore. That’s the strongest buying spree in Bloomberg-compiled data going back to 2012.

“A lot has to do with USD/KRW being attractive,” said Garg in an email interview. “But partially, it has also to do with easing of geopolitical tensions, which is reflected in Korea CDS going back to the lows.”

Piling In

Strongest pace of foreign inflows into South Korea's bonds market

Source: Korea Financial Investment Association, Bloomberg

* Data from Jan. 2 to May 4

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The cost of insuring the nation’s sovereign bonds has dropped after a historic summit between the two Koreas was held last month that called for a peace treaty and denuclearization. Credit-default swaps fell to 42 basis points — the lowest since March 12, according to data provider CMA. The Korean won has gained the most among Asian currencies in the last three months, strengthening by 0.9 percent against the dollar.

Foreign investors are also benefiting from lower hedging costs for won debt as Korean institutions make more overseas investments. Three-month onshore forward points, which reflect won hedging costs, fell to the lowest level since 2009 last month.

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