Bonds Decline

Futures are lower in South Korea, selling off even as equity markets are hit while foreign flows into South Korean bonds continue to slow.

• The pace of foreign buying in bonds has slowed to a crawl, yesterday foreign funds bought $65.5m of South Korean bonds, down from $686m on Monday and a high of $1.2bn last week. Funds bought $424m of South Korean equities yesterday, switching from sales of $508m on Thursday. The KOSPI is under pressure in early trade on Friday though with foreign investors selling KRW 68.4bn, and local intuitional investors selling KRW 140.9b according to data compiled by Bloomberg – the index Is currently down 1.4%.
• HSBC note that the BoK has room to act, and could be forced to should South Korea's yield premium erode: "The spread between long-dated KTBs and US Treasuries has compressed since the start of the year and appears quite low especially given the heavy bond supply. With an extra KRW9.9trn of KTB supply on top of the planned KRW176.4trn issuance due to supplementary budget, monthly supply is likely to be sizeable KRW17-18trn in the first half of the year. We, however, believe that demand from insurance sector is likely to persist at 10yr KTBs yield close to 2% level. We also note that the Bank of Korea (BoK) has been one of the most prudent central banks in Asia and has so far avoided any direct bond purchases except for the KTB purchases for open market operations (OMOs). BoK bought only KRW11trn of KTBs for OMOs in 2020 and plans to conduct KRW5-7trn of KTB purchases in 1H 2021. While these are not large amounts given the size of supply, we believe that the BoK has more scope to expand its bond purchases in the event of market volatility."
• Meanwhile, South Korea is posed to speed up the rollout of the AstraZeneca COVID-19 vaccine as part of its inoculation campaign as the European Union's medicines regulator assessed that there is no link to blood clots found in some recipients. There were 463 new coronavirus cases in the past 24 hours, staying in the 400s for the third day, as sporadic cluster infections have not shown let up in the greater Seoul area amid increased travels and loosened vigilance against the pandemic.
• Markets look ahead to 5-,20-year supply next week.