Starting in Apr., the inclusion of Korea's bond market in the FTSE World Government Bond Index (WGBI) will ramp up, and large inflows of foreign funds are expected. However, analysts said the effect on lowering yields will be limited because an unfavorable environment for bonds—such as rising global interest rates and geopolitical risks—continues.
Kim Ji-na, a researcher at Eugene Investment & Securities, said in a report on the 30th that the WGBI inclusion will act not as an absolute driver of lower yields but as a factor that offsets unfavorable conditions such as war and inflation at current yield levels and partially reins in yield increases.
Kim estimated total fund inflows from the WGBI inclusion of Korea's bond market at $52.0 billion (about 76 trillion won). Passive funds tracking the WGBI are known to total about $2.5 trillion, and Korea's index weight was around 2.08% as of the end of Oct. last year. The inclusion will proceed from Apr. to Nov. via partitioning, with an estimated average monthly inflow of about $6.5 billion (about 9.5 trillion won).
This is on par with foreigners' average monthly net purchases of bonds. Kim said, since 2020, foreigners' average monthly net purchases of won-denominated bonds have been around 8 trillion won, adding that the inflow effect from this index inclusion is large enough to be called "foreigners 2."
The benefits of new inflows from this index inclusion are likely to appear in long-dated issues. Kim said that, unlike existing foreign investors whose allocations were heavier in short-dated paper, the passive funds entering due to the index inclusion have a strong medium- to long-term investment profile, and that, as a result, longer maturities will benefit relatively more.
Indeed, by maturity within the WGBI, the 1–3 year bucket has the highest weight at 27.5%, followed by 10 years and longer at 24.98%, 3–5 years at 20.17%, 7–10 years at 14.23%, and 5–7 years at 13.09%.
Still, some note that if the won weakens further, actual inflows could shrink. Kim said that if a sharp won depreciation is reflected, Korea's index weight could fall into the 1% range, and that the size of bond funds tracking the WGBI itself may have decreased due to a global money move toward equities and weaker bond investment sentiment stemming from war.
Even so, considering that the average coupon rate of Asia-Pacific bonds in the current WGBI is 1.9% and the overall index stands at 2.72%, Korean Government Bonds are relatively high at the mid-3% level across all tenors. Kim added that the recent rise in yields has improved the CARRY appeal of domestic yields, which is positive.
Kim projected that the WGBI inclusion will act not to induce lower yields but to ease unfavorable conditions for yields—such as war and inflation—and partially curb yield increases.