Won Debt Held by Foreign Investors Monitored for Volatility
South Korea is preparing to increase monitoring won-denominated debt purchases by foreign investors and may start buying the securities should volatility in the market rise, said Shin Hyung Chul, director general of the treasury bureau at the Ministry of Strategy and Finance.
International ownership of South Korea’s domestic government bonds may climb to as much as 19 percent of the total within next year from 17 percent now, said Shin. The government would be concerned should short-term inflows into the debt market rise, he said.
“We plan to monitor the foreign-holdings ratio of benchmark sovereign bonds because, if ownership increases rapidly, the possibility of volatility rises as well,” Shin said in an interview in Gwacheon, south of Seoul, yesterday. “As a contingency plan, we may discuss with other government bodies and consider countermeasures such as purchasing the securities if we see sudden outflows.”
Demand is picking up for South Korean debt, with benchmark 10-year yields at 3.07 percent compared with 1.7 percent in the U.S. and 0.8 percent for Japan. The won has strengthened 1.8 percent against the dollar since the end of June, the third-best performer among the 11 most-used Asian currencies, according to data compiled by Bloomberg.
Foreign investors increased holdings of fixed-income securities by 1.4 trillion won to a record 89.7 trillion won ($79.7 billion) in July, the Financial Supervisory Service said in a statement this month. The government has no plan to regulate bond purchases by overseas investors, Shin said.
South Korea’s government may reduce debt sales next year as it boosts efforts to improve the balance between spending and revenue, according to Shin. It planned to issue 79.8 trillion won of fixed-income securities this year, the finance ministry said in a statement in January.
The nation is preparing to sell its first 30-year bonds next month to meet long-term financing needs as the population ages. Yields on the notes may be at “almost the same level” as those on debt due in a decade, considering that the difference between 10- and 20-year securities is only seven basis points, said Shin.
The government has no plan to sell dollar-denominated bonds “in the near future” as it sees strong foreign demand for local-currency debt, he said. South Korea last issued dollar sovereign debt in 2009.
The government may reduce issuance of inflation-linked bonds should demand dwindle because of slowing consumer-price gains and a proposed tax on such debt, said Shin. The pace of price increases reached a 12-year low of 1.5 percent in July, according to the most recent data. The government is planning to impose a levy on inflation-linked notes from 2015.