Foreign investors will likely pull their money out of the South Korean bond market starting in 2018 as they move to safer assets on an imminent rate hike by the US Federal Reserve, a report said Sunday.

According to the report by the Korea Institute of Finance, the rate difference between South Korean and US three-year Treasurys reached 0.37 percentage point as of September this year, narrowing from about 1 percentage point in 2014 and around 2.5 percentage points in 2012.


The narrowed disparity was driven by the Bank of Korea's low-rate policy, in which the country's key rate fell steadily to a record low of 1.25 percent, while the US Fed has kept giving out hints of a rate hike.

As a result, the margin of longer-term bonds reversed this year as interest rates of US bonds are higher than those of South Korea's.

At the same time, foreign investments on the local bond market decreased by 10.1 trillion won ($8.65 billion) from July last year to September this year.

"A rate increase in the United States may stir up risks of a rise in South Korea's base rate and won-dollar rate," the report said. "Foreign investors would sell off their South Korean bonds in advance as they are worried about losses on valuation of their Korean assets."

The KIF report noted that a foreign outflow will not happen in the near future but can start in earnest in 2018, when the US rate becomes higher than that of South Korea.

On the back of positive US employment data, the Fed is widely expected to raise the rate by 0.25 percentage point in its decision-making meeting slated for December and take an upbeat stance for a while next year. (Yonhap)