Kokusai Buys Record World Bank Bonds in Hunt for Yields Beating Treasuries
Japanese investors are scooping up record amounts of bonds sold by the World Bank and state-backed lenders, seeking higher returns as government debt yields tumble.
Kokusai Global Sovereign Open, Asia’s biggest bond fund, boosted holdings of such securities, known as supranational bonds, to 8.2 percent of its portfolio, the most ever. Mitsubishi UFJ Asset Management Co. started four funds that invest in the debt and Diam Co. is attracting record amounts earmarked for the notes. Japanese investors bought an unprecedented 2.18 trillion yen ($25.8 billion) net amount of overseas debt in the week ended Aug. 13.
Japan’s fund managers, who purchased more Treasuries than the Chinese this year, are seeking top-rated debt as yields fall around the world. The World Bank’s 7.625 percent bonds due in 2023 yield 3.27 percent versus 2.62 percent on 10-year U.S. notes. Japan’s 10-year bonds yield 1.11 percent, the least of 31 nations tracked by Bloomberg.
“A year ago, a lot of Japanese investors were seeking Treasuries,” said Hideo Shimomura, who helps oversee the equivalent of $59.2 billion as chief fund investor at Mitsubishi UFJ Asset in Tokyo. “Now U.S. rates are declining, so people are looking for extra yield without taking credit risk.”
Turning From Treasuries
Mitsubishi, a unit of Japan’s largest publicly traded bank, started funds this year that invest in yen- and dollar- denominated supranationals. In 2009, it began funds for the bonds in Australia and New Zealand currencies, Shimomura said.
Funds in Japan are turning to supranational bonds, such as those issued by the European Investment Bank in Luxembourg and the Nordic Investment Bank in Helsinki, after boosting Treasury holdings to a record $803.6 billion as of June, from $575.3 billion in May 2008, based on U.S. government data.
Ten-year Treasuries have become less attractive after their yields dropped to a 19-month low of 2.42 percent on Aug. 25. Rates on German bunds of similar maturity slid to a record low of 2.09 percent on Aug. 31.
Japanese funds snapped up another 1.04 trillion yen more of overseas bonds than they sold in the week ended Aug. 20 and 70.8 billion yen in the following seven days. Weekly purchases this year have averaged 497.3 billion yen, double 2009’s pace, based on Ministry of Finance records that start in 2001.
The flood of money into supranationals has caused most of the value in them to evaporate, said Kei Katayama, who helps oversee the equivalent of $53.8 billion as leader of the foreign fixed-income group at Daiwa SB Investments Ltd. in Tokyo, part of Japan’s second-largest brokerage.
Higher Yields
Dollar-denominated supranational bonds due in one to three years yield 23 basis points more than Treasuries, down from 1.60 percentage points in December 2008, according to a Bank of America Merrill Lynch index.
“More and more investors are trying to buy,” Katayama said. “I don’t see value.”
The Daiwa SB Asia Oceania Bond Mother Fund, which focuses on supranationals and sovereign bonds, fell 2.7 percent this year, according to Katayama, who said he’s been trimming his positions.
Currency Conversions
The yen’s surge to a 15-year high against the dollar in August has made Japanese investments in overseas bonds a losing strategy.
Dollar-denominated supranationals maturing in one to three years returned 2.7 percent in 2010, the Bank of America index shows. The figure turns into a 6.8 percent loss after accounting for the greenback’s slide versus the yen. Mitsubishi UFJ Asset’s Australian Dollar Bond fund has dropped 3.7 percent in 2010, Bloomberg data show.
The currency effect may reverse in the months ahead, based on forecasts collected by Bloomberg. The yen will weaken 11 percent to 95 per dollar by the middle of next year from 84.20 today, according to the median estimates in a survey of 29 currency analysts.
Potential gains from growth-sensitive currencies make supranational debt attractive, said Masataka Horii, one of four Tokyo-based investors who oversee the Kokusai fund’s $38.3 billion.
Horii favors the bonds of World Bank and European Investment Bank denominated in Australian dollars and Norwegian krona, getting both extra yield and a bet on the currencies.
“Australia and Norway have a big advantage because of their commodity exports,” Horii said.
Australia’s currency has fallen 8.1 percent against the yen in 2010, while Norway’s has plunged 15 percent. Against the dollar, the Aussie is up 1.5 percent while the krone has slipped 5.7 percent. Global Sovereign Open has lost 6.9 percent this year.
Yield Spreads
Australia is the world’s largest exporter of coal, with prices rising 29 percent in the 12 months ended Aug. 27, according to the McCloskey Group Ltd. Norway is the seventh- biggest exporter of oil, which has climbed 15 percent from this year’s low in May, according to data compiled by Bloomberg.
Supranational bonds are attractive because they also allow investors to bet on currencies, said Takuya Yamamoto, a portfolio manager at Diam in Tokyo, which has $102.3 billion in assets and is part-owned by Japan’s second-biggest life insurer.
The 43.6 billion yen Diam High-Rated Foreign Bond Fund, which focuses on supranationals and AAA rated government bonds such as those of Australia, New Zealand and Norway, has attracted 5.5 billion yen a month in 2010, Yamamoto said. It is the fastest growth since the fund, known as Triple Ace, started in October 2008, he said. The fund lost 4.8 percent this year.
“We’re focusing on supranational bonds denominated in emerging currencies such as the Brazilian real, Turkish lira and South African rand,” Yamamoto said. “They offer higher yields without emerging countries’ sovereign risk.”
To contact the reporter on this story: Wes Goodman in Singapore at wgoodman@bloomberg.net.
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