Foreigners net purchased a record high South Korean bonds worth more than 10 trillion won ($8.4 billion) in May amid increasing risk aversion that, at the same time, has forced offshore investors to dump Korean stocks over the same period.

According to data from Korea Financial Investment Association on Sunday, foreigners net purchased 10.5 trillion won worth of bonds over the counter in May, the largest amount since the association began compiling related data in 2006. The previous largest was in November 2007 when foreigners net bought 10.4 trillion won worth of bonds. There had been only two other occasions when monthly foreign net purchases surpassed 10 trillion won, which were in June and October 2009 in the wake of the global financial crisis.

In May, foreigners net bought 6.68 trillion won worth of government debts in Korea and 3.6 trillion won worth of currency stabilization bonds.

In stark contrast to the bond market, offshore investors dumped Korean stocks in May.

According to the country’s sole stock exchange operator Korea Exchange, foreigners net sold 2.5 trillion won worth of stocks in the Korea Composite Stock Price Index (Kospi) in May, the largest selling spree since October last year when they dumped almost 4 trillion won worth of Korean stocks with the main index dipping below the 2,000 mark.

NH Investment & Securities said offshore investors still consider the Korean stock market as the emerging market but the bond market in the developed category. This is why foreign demand for Korean government debts has recently increased amid increasing risk aversion due to the escalating trade tensions between the U.S. and China.

Shinyoung Securities Co. highlighted the fact that the recent weakening of the Korean won against the U.S. dollar has also upped foreigners’ appetite for Korean bonds that can offer arbitrage trading opportunities. Korean government debts also are stable and attractive given the country’s high credit ratings awarded by international rating agencies.

Some market analysts also interpreted that the rise in foreign buying of Korean stocks also indicates foreigners may be betting on a rate cut by the Bank of Korea later this year. According to NH Investment & Securities, foreigners increased purchases of won-denominated bonds in May amid growing expectations for a rate cut by the Korean central bank after the Reserve Bank of Australia governor hinted a rate cut in June. The Australian economy is considered to have a very similar structure with that of the Korean economy with both countries’ hefty reliance on exports, and the two countries’ policy rates have moved often in tandem.

By Chung Hee-young and Lee Eun-joo

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