Morgan Stanley Sees Japan’s Yield Hunt Reviving Post Golden Week

  • Purchases are set to start immediately, Morgan Stanley says
  • U.S. 10-year yield of 1.76% compares to minus 0.095% in Japan

Morgan Stanley says investors in Japan will rush into non-yen debt, now that the nation’s Golden Week holiday is over.

Japanese investors hunting for yield scooped up overseas bonds in February and bought a record amount in March, based on the latest data. History suggests investors will buy again following the string of holidays that ended May 5, according to Morgan Stanley. Demand may last through the Japanese business year that started April 1, the firm said in a report.

“Investors in Japan could buy non-yen bonds over the course of the fiscal year in sizes that will feel as unprecedented as the buying in February and March felt,” according to the May 6 report by analysts including Matthew Hornbach, the head of global interest-rate strategy in New York. “When should we expect investors in Japan to become more active? Our answer? Immediately.”

Money managers seeking alternatives to negative yields in Europe and Japan are flocking to higher-paying debt, sending the yield on Bank of America Corp.’s Global Broad Market Index to a record low of 1.27 percent Monday. Belgium and Ireland have tapped investor demand to sell 100-year bonds. Japan’s government may sell yen and buy dollars to curb its currency and funnel the money into Treasuries, according to Bank of America.

Seeking Alternatives

Japanese and U.S. bonds were little changed Tuesday, with 10-year yields in the Asian nation at negative 0.095 percent as of 6:49 a.m. in London, according to Japan Bond Trading Co.

Benchmark 10-year Treasuries yielded 1.76 percent, based on Bloomberg Bond Trader data. The price of the 1.625 percent security due in February 2026 was 98 3/4.

Japan’s purchases will probably be focused on five- to 15-year maturities, according to Morgan Stanley, which is one of the 23 U.S. primary dealers that underwrite the government debt. Investors in the Asian nation bought a net 5.21 trillion yen ($48 billion) of overseas bonds in March, the highest level in Finance Ministry data that go back to 2001.

Hornbach, in the middle of March, published a report saying 2016 may be the Year of the Bull for bonds. The Bank of America broad-market index has gained 1.8 percent since then. It’s up 3.9 percent in 2016, versus about 1 percent in 2015.

Yen Strength

This is an especially good time for Japanese investors to act because the yen is rallying, said Toshifumi Sugimoto, the chief investment office at Capital Asset Management. Japan’s currency has strengthened 11 percent versus the dollar this year.

U.S. 10-year yields will fall to 1.5 percent by Dec. 31 as Treasuries attract funds from outside the U.S., according to Sugimoto, who has 30 years of experience in bonds.

“We will see low long-term interest rates globally,” he said.

Japan would use dollars obtained in any currency intervention to buy U.S. Treasuries, or USTs, according to the Bank of America report Monday by analysts including Shyam S. Rajan, Adarsh Sinha, Yang Chen and Athanasios Vamvakidis. The reason is that the amount of securities in the nation’s reserve portfolio is shrinking while deposits are increasing, according to the report.

“Given that ‘cash’ levels are already high, we believe any intervention proceeds will likely be immediately invested into global government bonds,” the analysts wrote. “UST buying could be quick.”

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