Bond funds in South Korea are drawing large inflows again after heavy redemptions soured sentiment in the first half of the year. Nearly 1.6 trillion won ($1.1 billion) flowed in during just four trading days in October, supported by attractive bond yields and expectations of improving supply conditions in the Treasury market.
Bond funds took in a net 1.59 trillion won between the 1st and the 7th of this month, the Korea Financial Investment Association said on the 12th. Inflows continued for four straight trading days, exceeding last month's full-month net inflow of 1.18 trillion won by 414.2 billion won. Funds investing in domestic bonds attracted 1.54 trillion won, or about 96.7% of the total.
The shift stands in contrast to the first half, when nearly 10 trillion won left bond funds. Net outflows reached 5.14 trillion won in June alone, the largest monthly figure this year, before the trend turned positive in August with a net inflow of 266.1 billion won. Buying accelerated in September and October, pushing cumulative net inflows since August past 3 trillion won.
Exchange-traded funds showed a similar pattern. Domestically listed bond ETFs drew a combined 1.09 trillion won between the 6th and the 8th of this month, with about 85%, or 922.1 billion won, going into ultra-short-term bond ETFs. Global bond ETFs took in 106 billion won, corporate bond ETFs 37.3 billion won, inverse bond ETFs 30.4 billion won, general bond ETFs 10 billion won and government and public bond ETFs 6.9 billion won.
Across the bond market, high yields and reduced government debt issuance are cited as supportive factors for investment demand. The government decided to cut Treasury bond issuance this month by 5 trillion won from its original plan and to carry out 3.5 trillion won of early bond buybacks. Easing supply pressure can help stabilize market rates, and there is also speculation that part of the excess tax revenue could be used to further reduce issuance.
Yields on shorter maturities have been rising, however, leaving performance uneven across the curve. This month's Bank of Korea monetary policy board meeting and the future path of the base rate are seen as the main variables for the bond market. "Term premiums on major Treasury bonds are likely to stabilize somewhat amid expectations of supply adjustments," said An Jae-kyun, an analyst at Korea Investment & Securities. "But we expect bear flattening, with a sharp rise in short-term yields around the October rate decision."
Global markets are also seeing stronger inflows into bond funds. Global bond funds drew a net $33.84 billion last week, according to Yuanta Securities Korea, the largest amount in 18 weeks and about 80% more than the previous week's $18.79 billion. Over the same period, net inflows into global equity funds shrank to $12.41 billion from $15.76 billion.
Inflow intensity relative to net assets reached 52-week highs for government bond funds and investment-grade bond funds, at 0.90% and 0.45% respectively. Short-term bond funds also showed strong intensity at 0.65%, while high-yield bond funds, which focus on riskier debt, saw outflows. Analysts attribute the preference for safer, higher-quality debt to demand for locking in interest income at current yield levels combined with expectations that market rates will fall.