Key facts
- Foreign investors were net sellers of South Korean bonds in August.
- This is the first monthly net selling by foreign investors since January 2023.
- The net selling amounted to 839.7 billion won ($624.8 million).
- Korean bond holdings decreased by about 12.9 trillion won between July 24 and September 2.
- The decline in yield advantage for currency-hedged investments is a key factor.
- The arbitrage spread for short-term Korean bonds fell to minus 30 basis points as of September 10.
Foreign investors became net sellers of South Korean bonds in August, marking the first such monthly outflow in approximately 3 1/2 years, according to industry data released on September 13, 2026. This shift occurred as the yield advantage for currency-hedged investments in Korean bonds diminished compared to U.S. assets.
In August, foreign investors sold a net 839.7 billion won (US$624.8 million) worth of Korean bonds. This marks the first monthly net selling since January 2023. While foreign investors remained net buyers of 63.26 trillion won in the year through September 11, this amount represents a 35.2 percent decrease from the same period in the previous year. Their total holdings of Korean bonds also saw a significant drop, falling by about 12.9 trillion won from a record high of 356.6 trillion won on July 24 to 343.6 trillion won on September 2. This decline was the largest over a comparable 27-trading-day period in the past five years.
The primary driver for this trend is the erosion of arbitrage opportunities. Korean bonds have lost their yield advantage over U.S. assets after accounting for currency hedging. The arbitrage spread, which was 68.3 basis points at the end of the previous year, turned negative to minus 30 basis points as of September 10, making short-term Korean bonds less attractive than comparable U.S. dollar assets when hedged.
Despite the selling pressure, passive inflows related to South Korea's phased inclusion in the World Government Bond Index (WGBI) have provided some cushion. Market observers suggest that foreign net selling would have been more substantial without these WGBI-related inflows.