South Korea sees new inflows from countries including Japan with bond index entry
Corrects and recasts quote in paragraph 5 after official clarifies first part refers to Japanese bonds, not funds
By Cynthia Kim and Yena Park
SEOUL, Oct 17 (Reuters) -South Korea's surprise inclusion in a global bond index is expected to draw fresh money inflows from countries including Japan and help keep Korean bond yields steady amid rising debt supply, a senior government official said on Wednesday.
In a milestone for Asia's fourth-largest economy, FTSE Russell on Oct. 8 said it will add South Korean sovereign bonds to an estimated $30 trillion World Government Bond Index next year.
The decision will provide investors a new path to put their money into South Korean bonds as fund managers often track global debt indexes when allocating money.
For South Korea, it marks an opportunity to tap a larger pool of liquidity at a time when the government plans to borrow a record amount from markets to bridge a fiscal gap, and as global funds are piling back into emerging economies due to falling yields in the U.S. and Europe.
"Japanese bondsrepresent about 10% of the (WGBI) index and investment is mostly bypassive funds, and so we expect funds to invest a similar amounthere," South Korea's Vice Minister of Finance and Economy Kim Yoon-sang, said in an interview in Seoul.
The WGBI inclusion is also seen drawing inflows from super funds from Australia, Canada and the Middle East, all of which currently hold negligible amounts of investment exposure in Korean treasury bonds, according to the ministry.
That's money Korea needs as "such inflows represent rising demand for our debt helping to absorb planned issuances," Kim told Reuters, when asked if the local market is prepared to handle the record borrowing of 201.3 trillion won ($147.9 billion) planned for 2025.
Yields on South Korea's 10-year bonds are at around 3.0%, after declining over the last few months amid rising expectations for interest rate cuts.
Finance ministry officials have been working with the National Tax Service, the Korea Securities Depository, the central bank and regulators to upgrade the country's capital market in the last two years, extending trading hours for the dollar-won and making it easier for foreign investors to settle their trades through international clearing platforms such as Euroclear.
Longer term, the nation may see structurally lower interest rates, a phenomenon that could provide some relief to any market volatility, according to Kim.
"We have tools ready to stabilize markets if needed so there won't be a problem should volatility rise, but given that inflows will be mid- to long-term investments, they will actually work to reduce any volatility."
Reporting by Cynthia Kim
Editing by Ed Davies
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