Foreign investors withdrew funds from the South Korean stock market for the seventh consecutive month last month. Amid the investment slowdown in the semiconductor sector due to the DeepSeek shock and the added effect of U.S. President Donald Trump's tariff imposition, risk-averse sentiment was heightened.
According to the 'International Financial and Foreign Exchange Market Trends' announced by the Bank of Korea on the 12th, foreign stock investment funds saw a net outflow of $1.81 billion in February. This means that the funds withdrawn from the stock market exceeded those that flowed in.
Foreign stock investment funds recorded a net outflow for the seventh month since August last year ($1.85 billion net outflow). The Bank of Korea noted that this outflow was due to weakened investment sentiment in the semiconductor sector caused by the DeepSeek shock and the U.S. tariff imposition.
On the other hand, bond funds recorded a net inflow of $3.54 billion, marking a return to positive territory for the first time in three months. According to the Bank of Korea, this shift to net inflow was due to increased incentives for short-term arbitrage trading and sustained demand for mid- to long-term bonds.
Arbitrage trading incentives refer to the profits that can be earned when a foreigner borrows dollars, converts them into won, and then invests in domestic bonds. The arbitrage trading incentive expanded from 15 basis points (1 bp = 0.01 percentage points) on January 15 to 31 basis points in February.
The total foreign securities investment fund, combining stocks and bonds, showed a net inflow of $1.73 billion. This marked a return to net inflow after six months, following the $3.63 billion net inflow in August last year.
In February, the average fluctuation range and fluctuation rate of the won-dollar exchange rate were 5.6 won and 0.39%, respectively. This was a slight decrease from the previous month (5.9 won and 0.41%). The Bank of Korea explained that the won-dollar exchange rate fluctuated around 1,450 won due to heightened risk-averse sentiment stemming from uncertainties regarding the tariff policy of the new U.S. administration and concerns about a slowdown in the U.S. economy.
Last month, the credit default swap (CDS) premium on South Korean government bonds (based on the 5-year foreign exchange stabilization fund bonds) averaged 31 basis points, down 6 basis points from the previous month. The CDS premium rose from 34 basis points in November last year to 37 basis points in January this year before falling sharply. The CDS premium is a fee paid in case the government defaults and the principal cannot be recovered, and a lower figure indicates better conditions.