Deputy Prime Minister and Finance Minister Choi Sang-mok, left, and Bank of Korea Gov. Rhee Chang-yong give an interview at the Mininstry of Economy and Finance, Sept. 30. Yonhap

The trading volume of Korea treasury bonds (KTBs) between Feb. 24 and June 24 soared 71 percent from a year ago, MarketAxess, a global electronic trading platform for institutional credit markets, said Monday. Nearly half, or 49 percent of them were acquired by central banks worldwide.

Underpinning the robust growth was investor optimism about potential inclusion in the World Government Bond Index (WGBI), a global benchmark for the sovereign income market operated by the London-based FTSE Russell. The market capitalization-weighted bond index consists of the government bond markets of multiple economies.

The growth momentum has slowed over the past two months, partly due to an August report from Goldman Sachs stating that many offshore investors are hesitant to increase their holdings of Korean bonds because of a "tax waiver." The finance ministry has characterized this claim as a misinterpretation that fails to understand the country's tax system accurately.

"Trade volumes have leveled off this year, but we've seen steady growth in our trade count numbers," Roheet Shah, MarketAxess' head of dealer sales in the Asia-Pacific region, said in an interview with The Korea Times.

According to the U.S. platform operator, KTB's trade volume in the first quarter jumped 40 percent from the previous year. The figure for the second and third quarters registered year-on-year growth of 42 percent and 20 percent, respectively. It added that specific dollar figures are unavailable due to its rules.

"We are broadly flat from January through September, despite a strong first quarter. Recent conversations with the broader investor community are mixed, but they might be leaning toward Korea not being included in the WGBI index in 2024 and perhaps with our platform volumes are tapering off ahead of the upcoming announcement," Shah said.

Roheet Shah, head of Dealer Sales APAC / Courtesy of MarketAxess

The recent unfavorable sentiment notwithstanding, the strong growth in the first six months of this year was propelled by the government's measures to promote accessibility for foreign investors to the KTB market.

The Korea Securities Depository (KSD) opened up omnibus accounts with both Euroclear, June 27, and Clearstream, July 1, to help ease settlement for foreign investors.

The KSD also extended the foreign exchange (FX) market's trading hours from 3.30 p.m. (KST) to 2 a.m. the following day, in an effort to provide greater access to the global investor base that trades in different time zones.

Also notable was the inclusion of foreign banks on the list of registered foreign institutions (RFI) as a FX market participant, an important step in aligning Korea with global standards.

"With improving market efficiencies being one of the key foundations for these measures, it's worth noting the liquidity being made available on our platform has been primarily driven by our extensive KTB dealer panel," Shah said.

Goldman Sachs logo / EPA-Yonhap

Finance ministry refutes Goldman Sachs

Goldman Sachs published a report saying Korean bonds will not be able to make the FTSE index this year.

"The actual take-up of investors settling on Euroclear has been fairly light as investors have to acquire a tax waiver," the August report said.

However, Kwak Sang-hyun, director of the Government Bond Policy Division at the Ministry of Economy and Finance, said that the term "tax waiver" is a completely inaccurate characterization.

"I have exchanged emails with the writer of the report and made it clear that the correct term is non-taxation, not tax waiver," he said.

Tax waiver by definition requires, he said, official approval of the exemption after a review by authorities, unlike non-taxation, a matter of enforcement stipulated clearly under the law.

"The government has no discretion to grant or deny the request for tax exemption, as guaranteed under the law as of 2020. Non-taxation is a governing rule for the would-be and current WGBI countries."

Deputy Prime Minister and Finance Minister Choi Sang-mok said last week that Korea has met conditions for WGBI inclusion.

"Korea made the watchlist two years ago and has since spearheaded reforms to better accommodate offshore investors," he said during a presser at the Sejong Government Complex.

"The investors acknowledge that Korea is receptive to their requests. We are aware that they will need time to fully appreciate the measures."

Bank of Korea Gov. Rhee Chang-yong / Yonhap

BOK

According to the capital flow analysis team under the international department of the Bank of Korea, KTBs are popular with central banks of emerging and developed economies, including Singapore, Switzerland, Norway, China and Australia.

"Many offshore investors have favorable views of Korean Treasuries, although we cannot disclose the exact figures on the trading volume and trading count due to investor privacy concerns," a senior economist at the team said on condition of anonymity.

"Up until the 2009 financial crisis, investor demands were mostly from global investment banks. However, Korea has seen a marked inflow of sovereign wealth funds and publicly managed funds around the world since underpinned by their portfolio diversification efforts," he said.

"Also at play is the overall steady improvement in Korea's credit ratings, coupled with investors reorienting their funds from China to nearby robust investment destinations."

Korea issued 165.7 trillion won ($139.5 billion) of KTBs last year, down from 2.9 trillion won the previous year. The 2023 figure is still high compared to the 101.7 trillion won registered in 2019 before the height of the COVID-19 pandemic.