Japanese investors are turning to European asset-backed securities in search of higher yields as negative interest rates at home erode investment income, according to Morgan Stanley.
Banks and insurers from the world’s third-largest economy are particularly interested in U.K. mortgage bonds, according to Srikanth Sankaran, head of European credit and asset-backed securities strategy at Morgan Stanley in London. Bank of America Corp. said last month it sees Japanese investors moving into commercial and residential mortgage-backed securities in the U.S. and Europe.
Unprecedented monetary stimulus by the Bank of Japan has suppressed yields on government bonds and driven investors into riskier securities. The migration could prove a boost for Europe’s 368 billion-euro ($419 billion) asset-backed debt market, which has contracted more than 25 percent in the past two years.
“There’s momentum coming from Japan,” said Sankaran. “The arrival of new investors is a bright spot for a market that has been shrinking, in terms of assets and market participants.”
Norinchukin Bank, a lender for Japanese farmers and fishermen, acquired more than 2 billion pounds ($2.9 billion) of U.K. mortgage-backed bonds sold by Cerberus Capital Management, people with knowledge of the matter said in April.
BOJ Governor Haruhiko Kuroda adopted a negative interest-rate policy in January in a bid to stimulate consumption and investment. Yields on Japanese government bonds with maturities as long as 10 years turned negative this year after the BOJ announcement.
“The Bank of Japan’s policies have been a clear catalyst,” said Sankaran. “Continuation of these policies will likely determine how sustainable the interest in European assets will be.”