Arrivederci Treasuries as Italy Yields Lure Japan Investors

Why Are Japanese Investors Drawn to Italian Bonds?
  • Italy benchmark yield is 24 times that of U.S. after hedging
  • ‘Attraction of Treasuries is disappearing’: Nissay’s Miura

For Japanese investors hunting for yield but unwilling to take on currency risk, Italy really is “the beautiful country.”

Italian government bonds offer a yield of 1.2 percent over a decade after hedging, 24 times what’s on offer from equivalent U.S. Treasury notes after taking account of costs to protect against currency risk, according to calculations by Bloomberg. That’s the highest currency-hedged yield among the five biggest sovereign debt markets, despite nominal 10-year Treasury yields of about 1.6 percent.

The reason is the price of hedging, which is tied to the cost to borrow local currency with yen. Japanese investors pay about an annualized 1.5 percent for dollars because of soaring demand for the U.S. currency, but they get paid 0.08 percent to borrow euros, based on three-month currency forwards. That’s forcing them to reassess what has traditionally been their favored investment destination overseas. Even French 10-year government bonds offer hedged yields that are more than quadruple those of Treasuries.  

“The attraction of Treasuries is disappearing,” said Eiichiro Miura, the Tokyo-based chief fund manager at Nissay Asset Management, which oversees more than $60 billion. “Like others, we’re diversifying our investments, continuing a shift toward other developed nations’ bonds,” such as Italy and France, he said.

Click here for analysis of hedging costs for Japanese investors

The world’s biggest retirement pool -- Japan’s 134.7 trillion yen ($1.32 trillion) Government Pension Investment Fund -- revealed in an inaugural release of individual investments last month that its biggest foreign debt holdings after Treasuries as of the end of March 2015 were in Italy.
 

RankCountryHoldings
1   U.S.6.53 tln yen
2   Italy1.57 tln yen
3   France1.37 tln yen
4   U.K.1.29 tln yen
5   Germany1.15 tln yen

Italy’s higher yields don’t come without political risk. Prime Minister Matteo Renzi has called a referendum on overhauling the political system, aimed at ending the country’s unstable governments; if he loses, he has promised to quit. Italy also holds the lowest investment-grade rating of triple-B at the main ratings companies, compared with double-A assessments for France and the U.S.

Japan’s biggest life insurers are resisting Italy’s allure. In separate interviews last month, Nippon Life Insurance Co. said debt in France and Belgium offers better risk-rewards, while Dai-ichi Life Insurance Co. said it’s looking for new targets after snapping up Italian debt from April to June.

Life insurers’ net purchases of long-term foreign debt topped 2 trillion yen in July, a record amount in Ministry of Finance figures to 2005. Japanese investors bought the most Italian debt in two years in April, totaling about 215 billion yen, separate data from the ministry show.

“The relatively low hedging costs are pushing investors toward European bonds,” said Kenta Inoue, a senior foreign bond strategist at Mitsubishi UFJ Morgan Stanley Securities Co. in Tokyo. “As Japanese money compresses yields globally, it’s undeniable we’ll see progressively less separating the level of yields throughout Europe. As we say in Japan, it’ll be like comparing the height of acorns.”

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