As military tensions between the United States and Iran intensified and the global bond market weakened, Korea's Treasury bond yields in March also posted sharp gains across the curve. However, toward the end of the month, foreign buying on expectations of inclusion in the World Government Bond Index (WGBI) eased some of the upward pressure on yields.
The Korea Financial Investment Association stated accordingly on the 13th through "Over-the-counter bond market trends in March 2026." At the end of March, the 3-year Treasury bond yield stood at 3.552%, up 51.1 basis points (1 bp=0.01 percentage point) from a month earlier. The 5-year yield rose 49.9 bps to 3.777%, and the 10-year yield climbed 43.3 bps to 3.879% over the same period. Ultra-long tenors, the 30-year and 50-year, increased by 35.4 bps and 33.7 bps, respectively.
The Korea Financial Investment Association explained that rising geopolitical risk in the Middle East was the main driver behind higher yields. It said inflationary pressures grew as international oil prices surged on concerns about a prolonged closure of the Strait of Hormuz, strengthening expectations for a benchmark rate hike.
However, at the end of the month, ahead of expectations for Korea Government Bonds' inclusion in the WGBI in April, inflows of foreign funds partially capped the rise in yields. According to the association, net purchases of bonds by foreigners on Mar. 31 were about 4.5 trillion won, roughly three times the recent one-year month-end average.
Despite higher yields, funding expanded in the primary market. March bond issuance rose to 98.7 trillion won, up 18.3 trillion won from the previous month on increased issuance of Government Bonds and corporate bonds. Government Bonds totaled 37.9 trillion won, an increase of 3.6 trillion won, and corporate bonds rose 3.2 trillion won to 13.8 trillion won.
The corporate bond market showed a mixed trend by rating. Credit spreads widened slightly for AA- while narrowing slightly for BBB-. On a 3-year basis, the AA- spread rose to 61 bps from 60 bps, and BBB- fell to 641 bps from 643 bps.
The corporate bond book-building market appeared somewhat subdued. The total amount in March corporate bond book-building was 1.818 trillion won, down 822 billion won from a year earlier. There were 26 deals. Participation amounts in book-building also decreased from a year earlier to 8.099 trillion won. Analysts said this reflected issuers' wait-and-see stance amid rising yields.
By contrast, the secondary market saw active transactions. Despite higher yields, over-the-counter bond trading volume in March was 567 trillion won, up 140 trillion from the prior month. All categories increased, including Government Bonds at 97 trillion won, monetary stabilization bonds at 11 trillion won, and financial bonds at 25 trillion won.
By investor type, both individuals and foreigners were net buyers. Individuals were net buyers of 3.9137 trillion won, up 1.458 trillion won from a year earlier, including 1.632 trillion won of Government Bonds, 839.6 billion won of corporate bonds, and 539.1 billion won of special bonds. Foreigners were net buyers of 7.4 trillion won, down 4.7 trillion won from the previous month-end, including 9.6 trillion won of Government Bonds and 200 billion won of monetary stabilization securities.
Despite net buying, foreigners' holdings fell sharply. As of the end of March, foreigners held 340.4 trillion won of domestic bonds, down 10.2 trillion won from the previous month. This was the largest monthly decline on record, surpassing the previous record in Jan. 2023 (6.6 trillion won).
The association said, "As the conflict between the United States and Iran intensified, the cross-currency swap (CRS) rate, which reflects the expense of raising dollars, rose rapidly, significantly reducing foreigners' incentives for arbitrage transactions."