Seoul: South Korea's inclusion in the World Government Bond Index (WGBI) is expected to exert downward pressure on rising bond yields, though its effect on foreign capital inflows might be less significant than previously anticipated, local analysts indicated.

According to Yonhap News Agency, South Korea has commenced its phased eight-month inclusion into the WGBI, a prominent index that tracks the performance of government bonds from over 20 major economies, including the United States, Japan, and China. This index is followed by an estimated US$2.5 to 3 trillion of funds.

Ahn Ye-ha, an analyst from Kiwoom Securities, estimated that the passive fund inflow from South Korea's inclusion into the WGBI would be around 70 trillion (US$46.4 billion) to 80 trillion won. On Tuesday, offshore investors net purchased 2.77 trillion won (US$1.84 billion) worth of Korean government bonds, one day before the country's inclusion into the index began, as per data from the Korea Exchange (KRX), South Korea's main bourse operator.

This purchase amount represents the highest daily figure since September 30, 2025, when foreigners net purchased 2.8 trillion won. It also constitutes nearly 30 percent of the total net purchases of Korean bonds by foreigners in March, which totaled 9.49 trillion won, according to KRX data. Market watchers anticipate that bond yields will experience downward pressure as funds tracking the WGBI enter the local market.

Recently, South Korean bond yields have been on an upward trend due to inflationary concerns arising from the war between the United States and Iran. Yields on the benchmark three-year government bonds reached their highest level in over two years, closing at 3.63 percent on March 23. Bond prices move inversely to yields.

Lee Yoo-jung, an analyst at Hana Bank, noted that the country's inclusion in the index could alleviate pressure on the real economy by limiting the upward pressure on bond yields, as the market grapples with inflationary concerns from high oil prices and rising market rates.

However, some analysts argue that the passive fund inflow to South Korea may be smaller than anticipated, pointing to unfavorable market conditions. Kim Ji-na, an analyst at Eugene Investment and Securities, suggested that the amount of capital in funds tracking the WGBI may have decreased due to the war's impact on investment demand for bonds and the global capital movement amid a bullish stock market.