Foreigners in the Korean Bond Market: Is There a Conceptual Change Since COVID-19?

This paper focuses on the financial market variables and determinants which mainly affect foreign investors’ performances in the Korean bond markets. We also examine foreigners’ past and present participation in the Korean bond market for the past 12 years since 2008 while breaking down the whole research period into several sub-set periods using the Lehman crisis and recent COVID-19 outbreak as major fiducial marks. We present daily regression models based on new calculation formulae to calculate foreigners’ daily estimated return that includes not only realized but also unrealized profit. Daily investment results are measured by changes in the amount of foreign investment and return on their bond investment, presenting a three model regression. The paper also conducts a more in-depth analysis by using dummy variables comparing the impact of the Lehman crisis and recent COVID-19 to find out if there are any significant changes in behavior resulting from the incidents. Empirical results indicate that foreign exchange, swap basis, KTB futures index, and Korea CDS all have relevance to a certain extent for foreign investors’ daily movement on bonds. Regression results not only show causality with explanatory variables but also present a significant implication that there is a change in behavior since COVID-19. Considering the historically low yields of Korean bonds, it matters to see such an incremental change in foreigners’ Korean bond investment. Study implies there’s a major conceptual transition and change in foreign investors’ perception toward Korean government bonds and suggests Korea Treasury Bond (KTB) is now increasingly viewed as a safe investment instead of risky assets to foreign investors..