Foreign investors have rapidly restructured their Korean bond portfolios toward government bonds following the country's inclusion in the World Government Bond Index (WGBI), according to an iM Securities report released on the 15th. Analyst Kim Myung-sil estimated the actual increase in foreign investors' total bond holdings at 18.8 trillion won during the March 30 to July 10 period. The restructuring was driven by WGBI inclusion requirements, with investors reducing holdings in Monetary Stabilization Bonds, Foreign Exchange Stabilization Bonds, and financial bonds while increasing government bond allocations.
iM Securities Adjusts Net Purchase Calculations for Redemptions and Rebalancing
Kim Myung-sil emphasized that foreign investors' net purchases of government bonds should exclude reinvestment from maturing bonds previously held. The analyst noted that portfolio rebalancing—reducing holdings in Monetary Stabilization Bonds, Foreign Exchange Stabilization Bonds, and financial bonds while increasing government bond allocations—could occur, making it possible to overestimate the WGBI effect if all net government bond purchases are interpreted as new overseas capital inflows.
During the March 30 to July 10 period, foreign investors' net purchases of government bonds totaled approximately 38.6 trillion won. After accounting for 7.7 trillion won in redemptions, the increased balance stood at around 30.9 trillion won. Kim calculated the actual increase at 18.8 trillion won because funds shifted from non-government bonds to government bonds. Non-government bond holdings decreased by 12.1 trillion won during the same period.
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Foreign Investment Concentrates in Top 10 Government Securities
Kim raised questions about whether current foreign trading patterns represent pure WGBI passive funds. The analyst explained that WGBI is not an index that includes only specific benchmark securities but incorporates all eligible government bonds according to market value weights. Pure passive funds should show foreign holding increases broadly across not only new benchmark securities but also existing non-benchmark government bonds.
Conversely, if purchases concentrate only on certain new benchmark securities, this indicates that passive funds, existing foreign redemption reinvestment, active management, and liquidity-conscious operations are working together, according to Kim.
During the analysis period, 67 securities were eligible, with net buying occurring in 57 securities (85.1%) and net purchases exceeding 100 billion won in 49 securities. Kim noted that the trend is spreading across eligible securities in general, including non-benchmark securities, not just some new benchmark securities.
However, Kim pointed out that the number of purchased securities and actual fund allocation were completely different. The analyst specified that 48.0% of total net purchases concentrated in the top 3 securities, 61.1% in the top 5 securities, and 76.2% in the top 10 securities. This indicates that foreign demand cannot be explained solely by pure passive funds and appears to be a mix of optimized management and redemption reinvestment.
Barbell Structure Emerges in 3-5 Year and 10/30-Year Maturities
By maturity, purchases concentrated in the 3-5 year and 10/30-year segments. Kim explained that the 3-5 year segment offers excellent carry with high absolute interest rates while having low duration burden and the most abundant liquidity. In contrast, purchases in the 10-year and 30-year segments strongly reflect the nature of securing long-term duration required by WGBI.
Considering these factors, Kim determined that 3-5 year new benchmark securities and 10-year benchmark securities represent the most direct beneficiary segments from an investment strategy perspective.
![iM Securities Maturity Analysis]()
FAQ
What was the actual increase in foreign bond holdings after WGBI inclusion?
iM Securities analyst Kim Myung-sil estimated the actual increase in foreign investors' total bond holdings at 18.8 trillion won during the March 30 to July 10 period. This figure accounts for 7.7 trillion won in redemptions and a 12.1 trillion won decrease in non-government bond holdings, adjusting the gross net purchase figure of 38.6 trillion won.
How concentrated were foreign purchases in Korean government bonds?
Foreign investment showed significant concentration, with 76.2% of total net purchases focused on the top 10 securities. Specifically, 48.0% of purchases concentrated in the top 3 securities and 61.1% in the top 5 securities, despite net buying occurring across 57 out of 67 eligible securities during the analysis period.
