Finance Minister Choi Sang-mok gives a briefing at the Seoul Government Complex in Gwanghwamun, Oct. 9, 2024. News1

The martial law fiasco fallout is expected to cripple Korea's fixed income market, as evidenced by the net foreign sell-off of 3 trillion won ($2 billion) in Korean Treasury Bonds (KTBs) in December of last year, market watchers said Sunday.

Further advancing the pessimism is their 39-month high net sell-off of over 18 trillion won in KTB futures since Dec. 4, just hours after President Yoon Suk Yeol's botched martial law attempt. Many say investor sentiment will turn bearish in the coming months, as foreshadowed by the leading market indicator.

At stake are sharper-than-expected spikes in government funding costs, hamstrung by foreign dumping combined with plans to issue up to 240 trillion won in government bonds, including debt financing of up to 100 trillion won.

"The marital law fiasco tanked investor sentiment," an industry watcher said.

The fixed-income market of Korea has experienced a steady inflow of offshore investors since the 2009 global financial crisis, including global pension funds, sovereign wealth funds and central banks, underpinned by their portfolio diversification efforts, he said.

"Overall steady improvements in Korea's credit ratings since 2009 have helped investors reorient their funds from China to nearby robust investment destinations. The martial law development wiped out the near-term outlook," he added.

The industry watcher noted that the impact of the country's much-lauded inclusion in the FTSE Russell World Government Bond Index remains uncertain, eclipsed by escalating political conflict over the appointment of two Constitutional Court justices and Yoon's resistance to arrest warrants.

"Global credit rating agencies are closely following the developments, with the country's credit rating precariously hanging in the balance," he said.

The comment is in line with the stance of Bank of Korea Gov. Rhee Chang-yong who rushed to defend acting President Choi Sang-mok for appointing the two justices on Friday.

"Once the rating goes down, it is extremely difficult to have it raised back up. Choi made the right decision. It was a wise and necessary choice," Rhee said during a New Year's address.

According to the Ministry of Economy and Finance, foreign holdings of KTBs dropped about 3 trillion won in December of last year, with the annual net inflow standing at around 19 trillion won.

More pronounced was the net sell-off of 15.9 trillion won worth of KTB futures the same month, with maturities of between three and 30 years.

The figure climbed to over 18.7 trillion won from Dec. 4 to Dec. 31.

The hawkish U.S. Federal Reserve and subsequent delays in expectations of a swift easing played a part, but political turmoil was a greater factor in the short-term rapid foreign selloffs.

The ministry plans to issue an all-time high of 197.6 trillion won in KTBs, 80 trillion won of which will be debt-financed. The debt could spike further to 100 trillion won, with up to 20 trillion won in extra budget factored in.