The Asia Development Bank and the Bank of Korea said on March 17 that foreign investors’ net purchases of treasury bond futures led the treasury bond price determination in the spot and futures markets alike last year.
This means that foreign investors’ purchase of treasury bond futures led to a decrease in the treasury bond rate as well as an increase in the price of the futures. The banks’ research team analyzed the rates of return in the markets by period and investor, trading volume, purchase patterns, and the like to reach the conclusion.
Foreign investors have consistently increased their presence in the spot and futures markets, and this has resulted in greater influence on the prices. Specifically, they accounted for less than 1 percent of the Korean bond market in the mid-2000s, but the percentage amounts to 15 percent now. This rapid increase has contributed to the liquidity and maturity of the domestic bond market. Still, it could pose a volatility problem if they exhibited speculative behavior.
The team added that foreigners’ net purchases of the treasury bond spot had no significant influence on the rates of return, unlike the purchase of futures. Foreign investors tend to prefer futures in view of taxes and liquidity. Also, it was found that the unpredicted net purchase by foreigners was a bigger deciding factor than domestic institutional investors.
“This is because foreign investors rely much on not only the overall economic situation, but also news and private information, and make decisions for global portfolio adjustment,” the team explained, continuing, “Meanwhile, Korean institutions tend to depend on predicted information like economic conditions.”