Japanese dumped German sovereign debt for a fifth straight month, poised for the biggest net annual sales on record, as they bought the higher-yielding notes of France, the U.S. and Australia.
Investors sold 1.05 trillion yen ($10.3 billion) of bunds in May, taking sales this year to 4.5 trillion yen, according to data from Japan’s finance ministry and central bank. They boosted holdings of French sovereign bonds by 1.86 trillion yen, a record in the data back to 2005, and added 731.6 billion yen of U.S. Treasuries and 129.2 billion of Australian securities.
Japanese have reduced their exposure to the debt issued by Germany this year, with 10-year yields there at a one-year low and the widest discount to similar-maturity U.S. Treasuries since 1999. Germany’s 1.25 percent benchmark yield is the lowest in the euro area and compares with 1.69 percent for France, 2.81 percent for Italy and 5.84 percent for Greece.
“Yield is what Japanese investors are always looking for,” said Geoffrey Kendrick, head of Asian currency and interest-rate strategy at Morgan Stanley in Hong Kong. “If the view is that both France and Germany have the same risk, then they might go for French debt.”
Bonds across Europe have climbed this year, led by a 30 percent gain in Greece and a 16 percent advance in Portugal for debt due in more than 12 months. The nations offer the highest 10-year yields for euro-area members tracked by Bloomberg.
Demand for the sovereign securities increased after the European Central Bank last month decided to cut interest rates, introduce a deposit charge and provide cheap loans. President Mario Draghi’s July 2012 pledge to do “whatever it takes” to backstop the currency bloc spurred investor confidence that the euro region wouldn’t break up.
“If you feel as though the ECB can backstop the semi-core and peripherals, you take them for the yield,” said Martin Whetton, an interest-rate strategist in Sydney at Nomura Holdings Inc. The semi-core would include France, the Netherlands, Luxembourg and Belgium, he said. Peripheral countries typically refer to Europe’s lower-rated nations.
Selling of German debt can probably continue, though “at a slower pace,” Whetton said.
Japanese purchases of U.S. Treasuries in May were the biggest since November and a third straight month of buying. They net bought Australian sovereign securities for a fifth month, taking 2014’s total to 469 billion yen, poised for the first annual purchases since 2011. Data on Japanese flows are available back to 2005.
Germany’s 10-year yield fell to 1.235 percent on July 2, the least since May 2013. It offered 1.37 percentage points less than similar maturity U.S. Treasuries on July 4, the biggest discount since June 1999, based on closing levels.