Foreign Investors Net Buy 150,000 Korean 10-Year Bond Futures Amid Flattener Bet

Foreign investors in the Korean treasury bond futures market net sold 210,000 contracts of 3-year futures while net buying 150,000 contracts of 10-year futures since early this year, according to analysis by Shinhan Investment Securities researcher Kim Chan-hee. The divergent trading pattern reflects a potential flattener betting strategy, with the gap between 10-year and 3-year futures net purchases shifting from near-zero levels to around 140,000 contracts by end of April. This represents a reversal from the steepener positioning observed in October 2024 when the Bank of Korea began rate cuts, when the net buying gap reached -200,000 contracts. Kim attributes the shift to expectations that long-term rate increases driven by geopolitical risks and semiconductor-led economic boom may pause or decline, while short-term rates rise as the central bank enters a rate-hiking cycle. The analysis was published in a July 4 report titled 'Why Did Foreigners Buy 10-Year Futures?'

Foreign Investors Net Buy 150,000 Contracts of 10-Year Futures Since Early This Year

Kim Chan-hee stated in the report that "the direction of supply and demand for 3-year and 10-year futures began to diverge since early this year." Foreign investors net bought 150,000 contracts of 10-year futures from the start of the year, while net selling 210,000 contracts of 3-year futures during the same period.

The gap between foreign investors' net purchases of 10-year and 3-year futures stood at near-zero levels in October 2024 before widening to -200,000 contracts over approximately six months, reflecting steepener betting around the start of rate cuts. Early this year, the net buying gap converted from -200,000 contracts to positive territory within two months, reflecting a flattener position.

Shinhan Securities Analyst Interprets Trading Pattern as Flattener Betting

Kim stated that "recent foreign investor supply and demand trends in the 3-year and 10-year futures markets can be interpreted as flattener betting." The net buying gap between 10-year and 3-year futures, which stood at near-zero levels at end of April, surged to around 140,000 contracts.

The researcher explained that "this is a bet predicting that long-term rate increases, which rose preemptively reflecting geopolitical risks and semiconductor-led economic boom, will pause or decline, while short-term rates will expand their upward movement as the economy enters a full-fledged rate-hiking period." Kim assessed that viewing the 10-year futures buying as a simple bullish signal is unreasonable, stating it is more rational to interpret it as a curve play rather than a directional bet.

Alternative Hypothesis Points to Value Buying After Rate Spike

Kim presented an alternative interpretation that the pattern may represent short-term value buying. The researcher stated that "it could be a valuation call-type investment following a rate surge period," noting that "the fact that no additional futures net buying inflows occurred in the sideways rate movement period since June also supports this."

Kim emphasized that for this foreign investor futures supply and demand to be meaningful, confirmation of a peak in growth momentum and supply hints is necessary. The researcher stated that "foreign investor futures net buying that unfolds until then is likely to be short-term betting or arbitrage-type betting similar to recent patterns," adding that "momentum can be confirmed through continuity of export and inflation indicator surprises or an upward consensus trend."

Researcher Identifies Conditions for Confirming Meaningful Trend

Kim mentioned that "the point when the typical trend-following investment pattern resumes, rather than this year's value-buying pattern, is highly likely to be a signal confirming a meaningful bullish trend." The researcher indicated that growth momentum confirmation and supply hints serve as key criteria for distinguishing between short-term tactical positioning and sustained directional investment by foreign participants in Korean bond futures markets.

FAQ

What did foreign investors do in Korean bond futures since early this year? Foreign investors net sold 210,000 contracts of 3-year Korean treasury bond futures while net buying 150,000 contracts of 10-year futures since early this year, according to Shinhan Investment Securities researcher Kim Chan-hee's analysis published July 4.

Why does Shinhan Securities interpret this trading pattern as flattener betting? Kim Chan-hee stated the divergent positioning reflects expectations that long-term rate increases driven by geopolitical risks and semiconductor-led economic boom may pause or decline, while short-term rates rise as the central bank enters a rate-hiking cycle, making it more rational to view as a curve play rather than directional bet.

How did the net buying gap between 10-year and 3-year futures change? The gap between foreign investors' net purchases of 10-year and 3-year futures shifted from -200,000 contracts in October 2024 to positive territory within two months in early this year, reaching around 140,000 contracts by end of April according to the Shinhan Securities report.