Since the imposition of emergency martial law on the 3rd of last month, foreign investors have started to sell off government bonds, which had been considered an attractive investment outlet. Concerns have been raised that this could hinder funding, especially as the fiscal authorities had planned record levels of government bonds issuance this year.
According to authorities and the financial investment industry, the amount of government bonds held by foreign investors was provisionally reported to have decreased by about 3 trillion won in December last year. This indicates a net sale of about 3 trillion won in government bonds over the month.
As a result, although foreign investors recorded an annual 'plus' of about 19 trillion won in government bonds last year, they failed to surpass 20 trillion won due to a switch to negative by the end of the year.
In the futures market, which serves as a leading indicator, the 'selling' moves by foreigners are noteworthy. According to the Ministry of Strategy and Finance's government bonds market statistics, foreign investors net sold about 15.8949 trillion won worth of Korean government bonds (based on futures for 3 to 30 years) in December last year.
From December 4, soon after the emergency martial law began, they net sold about 18.7131 trillion won. On a monthly basis, this is the largest net sale amount in three years and three months, following the negative 21.3513 trillion won recorded in September 2021. Investor sentiment, which had bet on rising prices (falling interest rates) of Korean government bonds, has stalled.
While the Federal Reserve (Fed) has sent somewhat hawkish messages, suggesting that global interest rate cuts may be delayed, analyses indicate that political instability in Korea has further fueled the selling pressure.
If the foreign selling of government bonds intensifies due to prolonged political instability, it could hinder the fiscal authorities' funding efforts. According to the '2025 Government Bonds Issuance Plan' confirmed by the Ministry of Strategy and Finance, the total issuance limit for government bonds this year is set at 197.6 trillion won, the largest in history. Of this, the limit for net issuance alone is 80 trillion won.
This means that apart from the issuance aimed at market-making, such as refinancing maturing government bonds or buybacks to alleviate repayment risks, the so-called 'deficit government bonds' that increase national debt amount to 80 trillion won.
Separately, the issuance of about 20 trillion won worth of 'won-denominated foreign exchange stabilization bonds' is also expected. Considering the government bonds, the won-denominated foreign exchange stabilization bonds, and the potential volume for supplementary budgets, the total government bonds that the market will need to absorb could reach between 230 trillion and 240 trillion won.
When the issuance of government bonds increases, interest rates rise (prices fall). Given the already high pressure for rising interest rates due to record levels of government bonds issuance, if foreign selling is added, there is significant concern that market interest rates could surge. Even if the market can absorb the government bond volume, the central government will face increased funding costs.
However, the government explained that the seasonal factor of payments coinciding with the maturity of government bonds in March, June, September, and December, combined with the year-end ledger closure, has contributed to the situation. It is noted that interpreting this as a signal for selling off Korean government bonds is premature.