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Korea will draw an inflow of up to $67 billion (90 trillion won) in offshore investor funds, buoyed by the country's inclusion in the World Government Bond Index (WGBI) operated by the London-based FTSE Russell, government officials and market watchers said.

FTSE Russell announced Wednesday (local time) that Korea will be included in November next year, after a grace period of one year, followed by a phase-in period of another year. The market capitalization-weighted bond index is a global benchmark for the sovereign income market, It consists of the government bond markets of multiple economies.

Further advancing the optimism is the increase in foreign investment translating into more stable yields on Korea Treasury Bonds (KTBs) and healthy supply-demand dynamics in the foreign exchange (FX) market. The latter will contribute to fewer attempts at scalping, an investment technique whereby investors buy and sell their positions over a very short period to net small differences quickly.

Also expanded will be the country's investor base to include global pension funds, private asset managers, publicly managed funds and international financial entities.

The KTB issuance will increase, stabilizing bond yields. More long-term foreign investment is expected to reduce the term premium, an additional yield that investors require to hold their positions longer compared to shorter-duration bonds. The lower the figure, the greater the investor confidence in the Korean market.

However, the sensitivity of the local bond market to external conditions will heighten somewhat, due to greater influx of WGBI-tracking funds. The “passive” funds are of longer duration and stable compared to shorter-duration fixed income sources.

“We are very happy to say the least,” said Kwak Sang-hyun, director of the Government Bond Policy Division at the Ministry of Economy and Finance.

“Months of anticipation, anxiety and worry were well worth it in hindsight. We are glad that the foreign investors expressed faith and acknowledged our efforts to advance the financial market and revise tax systems to better accommodate the needs of fixed income investors.”

The timeframe extending through next year seeks to grant global investors time to prepare, since Korea's weight in the index will reach a heavy 2.22 percent of the total. For context, Canada's current figure is 1.72 percent, while that of Spain is at 4.06 percent and the U.K at 4.86 percent.

Wednesday's feat followed three previous failed attempts. Korea made the watchlist of FTSE WGBI in September 2022, and has since spearheaded measures to extend FX operating hours, implementing non-taxation for offshore investors. The months of efforts led to an upgrade of Korea's market accessibility rating to level 2, up from 1.

“The Korean bond market will see offshore investment of between $2.5 trillion and $3 trillion every quarter starting November next year. The total could be as high as $67 billion,” Kwak said.

Global investors' trust in the advancement of Korea's capital market is strong, as validated by the WGBI inclusion, according to Deputy Prime Minister and Finance Minister Choi Sang-mok.

“It will significantly fortify the government's fiscal planning capabilities and stabilize the FX market in the years to come,” he said during a press conference at the Seoul Government Complex in Gwanghwamun.

“We will continue to maintain close communication with stakeholders to create a healthy feedback loop whereby investor risks are reduced and their convenience is enhanced.”

Riad Chowdhury, head of APAC at MarketAxess, a U.S. fixed income trading platform, said the firm was excited about this announcement.

“Korea is one of the most actively traded bond markets on MarketAxess from our global client base. The WGBI inclusion as well as India's inclusion in the JP Morgan Emerging Market Global Diversified Index (GBI-EM) earlier this year, demonstrate the increasing momentum Asia fixed income is getting from global investors and index providers.”

According to a Bloomberg survey from Jan. 30 to March 11 of 300 investors with no experience in KTB investment, about 80 percent said that WGBI inclusion will have a positive impact on their investment behavior.

The ministry expects the issuance total of KTBs next year to stand at 201.3 trillion won, up 27 percent from the previous year. The net issuance adjusted for rollovers will reach 83.7 trillion won, up 68 percent.