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WGBI inclusion offers little relief for weak won as return to pre-war conditions remains elusive

Published: 01 Apr. 2026, 18:01 Updated: 01 Apr. 2026, 19:18

JIN MIN-JI
[email protected]

An employee at Hana Bank's counterfeit response center in central Seoul examines dollars bills on March 5. [YONHAP]

[NEWS ANALYSIS]

Korea’s inclusion in the FTSE World Government Bond Index (WGBI) has come at a critical time, as the country anticipates up to $60 billion in foreign inflows that are poised to support the persistently weak won. Yet geopolitical tensions, which have heightened inflationary pressures and fueled concerns over interest rate hikes, have blunted the currency’s gains from the index inclusion.

“Korea’s government bonds have been included in the WGBI as of today,” said Finance Minister Koo Yun-cheol on Wednesday, marking the start of inflows projected to reach between $50 billion and $60 billion by November.

The development is a breakthrough for Seoul, which has spent over a decade pushing for inclusion in the WGBI, a benchmark that tracks fixed-rate, local-currency, investment-grade government bonds across more than 20 markets and is closely followed by global institutional investors. The bond index is compiled by FTSE Russell, a subsidiary of the London Stock Exchange Group.

“Funds have been confirmed to be flowing in this week," Koo said. "This is expected to help stabilize our foreign exchange and financial markets, which have seen increased volatility due to the Middle East conflict.”

Despite U.S. President Donald Trump’s remarks that the Iran war could end in two to three weeks, markets remain volatile as investors have grown skeptical after a series of similar signals from the administration that the conflict may be nearing its end.

The won traded at 1,501.3 to the dollar on Wednesday, strengthening 28.8 won from the previous session, but still above the psychological threshold of 1,500. As funds began to flow in, the benchmark 10-year treasury bond yield fell below 3.5 percent for the first time in over a week, but the rate is still higher than the 2 percent range seen last year.

Finance Minister Koo Yun-cheol speaks in a conference on macroeconomics at the government complex in central Seoul on April 1. [NEWS1]

Korea’s inclusion weight in the index is estimated at 2.08 percent, corresponding to a monthly inflow of roughly $6.5 billion — more than the roughly $6 billion in government bonds net purchased by foreign investors in March, according to the Korea Financial Investment Association. However, analysts caution that immediate impacts on the market could be limited.

“Rising oil prices and inflation concerns have already pushed overall foreign exchange levels so high that the impact of WGBI inclusion is unlikely to be significant,” said Jung Wha-young, the head of the fixed income research center at the Korea Capital Market Institute.

The end of the war isn’t expected to immediately ease market pressures, as lingering uncertainties and structural changes in the region could continue to weigh on the won.

“The U.S. troop withdrawal from Iran does not mean a return to pre-war conditions. For example, Iran could continue imposing transit fees on ships passing through the Strait of Hormuz, limiting the potential for a sharp appreciation of the won even after the conflict ends,” Jung added. Iran has started charging transit fees on some commercial vessels passing through the Strait of Hormuz on an ad hoc basis, according to a Bloomberg report in late March.

Weak demand for bonds could also result in foreign inflows falling short of expectations, driven by a more aggressive outlook for rate hikes amid inflationary pressures. Rising policy rates make bond investment less attractive because they push up yields on newly issued bonds, causing the prices of existing bonds to fall. Korea's 10-year treasury bond yield rose to 3.62 percent on March 23 — the highest level since November 2023.

While the Bank of Korea (BOK) has kept the base interest rate unchanged at 2.5 percent since July of last year after a four-cut streak from October 2024. The inflationary pressure caused by the energy crisis and the scheduled execution of a 26 trillion won supplementary budget are putting pressure on the central bank to raise the rate, especially as BOK governor nominee Shin Hyun-song, scheduled to take office later this month, is considered a hawkish economist.

The effect of the policy rate on foreign capital inflows was illustrated through examples from other countries.

Net foreign inflows into New Zealand bonds totaled only $1.3 billion in the fourth quarter of 2022, following its inclusion in the WGBI in November, according to Kim Chan-hee, a fixed income strategist at Shinhan Investment & Securities, in a March report. This was just one-third of the $4.5 billion initially expected from WGBI-tracking funds, as the inclusion coincided with a period of a rapid rate-hike cycle to curb inflation.

Electronic display boards show Korea's financial market at Woori Bank's trading room in central Seoul on April 1. The Kospi advanced 8.44 percent to 5,478,7, while won traded at 1,501.3 against the U.S. dollar as of 3:30 p.m., rising 28.8 won from the previous session. [NEWS1]

By contrast, Israel saw net foreign bond purchases far exceed expectations following its inclusion in April 2020, reaching $12.4 billion versus the $7 billion projected from WGBI-tracking funds. A rate-cut cycle to cope with the economic impacts of the pandemic spurred additional inflows, helping stabilize both bond yields and the exchange rate, Kim added.

While the WGBI inclusion is expected to support the rapidly depreciating won as market conditions stabilize over the year, its impact is likely to remain limited through April.

“April is typically the peak season for dividend payments, which raises demand for the dollar as repatriation flows can put pressure on the exchange rate,” said Park Sang-hyun, an analyst at iM Securities. “Under the current administration, government policies have encouraged companies to increase dividends, which could further boost dollar demand this April compared with previous years.”

Park added, “Although a strong immediate impact from the inclusion is unlikely, the WGBI effect is expected to be significant, serving as a structural strengthening factor for the market over time.”

BY JIN MIN-JI [[email protected]]