Foreign capital flows into South Korea's bond market shifted composition following World Government Bond Index (WGBI) inclusion, with Europe closing the gap on Asia. The share gap between Asia and Europe in foreign bond holdings narrowed from 4.7 percentage points in December to 0.4 percentage points in May, according to monthly data compiled by the Financial Supervisory Service. Asia's share dropped from 41.4% in December to 40.0% in May, while Europe's share rose from 36.7% to 39.6% over the same period. The convergence followed a sharp March market adjustment triggered by rising treasury yields after US airstrikes on Iran in late February, which prompted a 6.8 trillion won net outflow from Asia but only 3.4 trillion won from Europe. FTSE Russell assigned South Korea an initial WGBI weight of 0.24% in April, scheduled to increase incrementally to approximately 2% by November.
Asia and Europe Bond Holdings Gap Narrows to 0.4 Percentage Points
Asia's share of foreign bond holdings in South Korea stood at 41.4% at the end of December, rose to 41.8% at the end of January, then declined through 41.6% in February to 40.0% at the end of May. Europe's share increased from 36.7% at the end of December to 36.8% at the end of January, then rose to 37.0% in February and 39.6% at the end of May. The gap between the two regions widened from 4.7 percentage points at the end of December to 5.0 percentage points at the end of January, then narrowed rapidly to 4.6 percentage points in February, 3.2 percentage points in March, 1.7 percentage points in April, and 0.4 percentage points in May.
Asia Records 6.8 Trillion Won Outflow in March Adjustment
Monthly net investment flows show Asia recorded 1.1 trillion won in December, 2.6 trillion won in January, and 2.6 trillion won in February, maintaining steady inflows through early months. The trend reversed sharply in March with a 6.8 trillion won net outflow. April saw 100 billion won and May 2 trillion won in net inflows, which have not yet recovered the March outflow. Europe recorded 2.5 trillion won in December and approximately 100 billion won in January, then saw 2.7 trillion won and 3.4 trillion won in net outflows in February and March respectively, before accelerating to 2 trillion won in April and 5.7 trillion won in May. For the January-to-May cumulative period, Europe recorded 7.04 trillion won in net investment while Asia recorded only 500 billion won due to the March outflow impact.
Treasury bond net investment specifically showed 3.7 trillion won in December, 6.05 trillion won in January, and 9.47 trillion won in February, before reversing to a 6.81 trillion won net outflow in March. Following the April WGBI inclusion start, net investment returned to 4.72 trillion won in April and expanded to 9.89 trillion won in May. Treasury bond holdings increased from 297.1 trillion won at the end of December to 301.5 trillion won at the end of January and 310.5 trillion won at the end of February, then decreased by 9.3 trillion won to 301.2 trillion won at the end of March, before recovering to 315.9 trillion won at the end of May.
Short-Term Maturities Drive March Outflow Pattern
The March adjustment affected the entire market regardless of region. Treasury yields surged following US airstrikes on Iran at the end of February. The 3-year benchmark yield rose from 3.040% on February 27 to 3.555% at the end of March, while the 10-year yield increased from 3.445% to 3.877% over the same period. Both Europe (3.4 trillion won) and Asia (6.8 trillion won) recorded net outflows in March, though Asia's outflow was nearly double Europe's, indicating different regional sensitivity levels to the same market shock.
By maturity segment, bonds with remaining maturity under 1 year recorded a 16.47 trillion won net outflow in March, driving the overall adjustment. In contrast, 1-to-5 year bonds maintained 2.6 trillion won in net investment and bonds over 5 years maintained 2.9 trillion won in March. The March capital outflow concentrated in short-term maturities while medium- and long-term bond purchases continued despite the shock.
Europe Net Inflows Accelerate to 5.7 Trillion Won in May
Following the April WGBI inclusion start, concentration in medium- and long-term bonds intensified. Net investment in 1-to-5 year bonds increased from 5.68 trillion won in April to 7.02 trillion won in May, while bonds over 5 years rose from 3.83 trillion won in April to 4.3 trillion won in May. Bonds under 1 year recorded 9.07 trillion won and 2.53 trillion won in net outflows in April and May respectively, maintaining negative flows. Given that index-tracking funds replicate benchmark constituents (weighted toward medium- and long-term bonds), the April-May maturity structure shift represents a further steepening of existing trends.
Americas-region funds maintained positive flows from December through May but declined steadily in scale from 100 billion–2 trillion won range to 600 billion won range. Unlike Europe and Asia, Americas flows were not affected by the March adjustment but showed no clear acceleration following the WGBI momentum. KB Securities stated in a report at the end of March that WGBI-tracking funds are passive in nature and that pre-inflow funds were likely limited given South Korea's inclusion weight was first formalized on March 5.
According to the Ministry of Strategy and Finance, foreign net purchases of treasury bonds totaled 37.3 trillion won on an execution basis (March 30–June 26) and 30.7 trillion won on a settlement basis (April 1–June 26) following WGBI inclusion. The Financial Supervisory Service's net investment figures are settlement-based and exclude maturity redemptions. A bond market official stated that with local investors largely sidelined due to poor first-half performance, market participants' attention is focused on which buying entities — whether the National Pension Service or WGBI funds — will purchase treasury bonds and in what volumes.
FAQ
What caused the gap between Asia and Europe bond holdings in South Korea to narrow in May?
The gap narrowed from 4.7 percentage points in December to 0.4 percentage points in May due to divergent recovery speeds after a March market adjustment. Asia recorded a 6.8 trillion won net outflow in March and slower subsequent inflows (100 billion won in April, 2 trillion won in May), while Europe accelerated inflows to 2 trillion won in April and 5.7 trillion won in May following the WGBI inclusion start.
Why did foreign investors withdraw 6.8 trillion won from South Korea bonds in March?
Treasury yields surged after US airstrikes on Iran at the end of February. The 3-year benchmark yield rose from 3.040% on February 27 to 3.555% at the end of March, and the 10-year yield increased from 3.445% to 3.877%, creating unfavorable conditions for new purchases across all foreign investor regions.
How did WGBI inclusion affect South Korea's bond maturity structure?
Following the April WGBI inclusion start, net investment in 1-to-5 year bonds increased from 5.68 trillion won in April to 7.02 trillion won in May, and bonds over 5 years rose from 3.83 trillion won to 4.3 trillion won. Bonds under 1 year recorded continued net outflows of 9.07 trillion won in April and 2.53 trillion won in May, reflecting index-tracking funds' focus on medium- and long-term benchmark constituents.
