Morgan Stanley’s Ichikawa Sees BOJ Boosting Overseas Debt Demand

Tatsuo Ichikawa, the co-head of fixed income in Tokyo at Morgan Stanley MUFG Securities Co., comments on market implications from the Bank of Japan’s decision last week to double monthly bond purchases.

Japanese investors may seek out French government debt and U.S. mortgage-backed securities as the BOJ’s easing compresses domestic yields, according to Ichikawa, who spoke in an interview in Tokyo on April 10.

The yield on Japan’s 10-year government bonds touched a record low of 0.315 percent on April 5 and then surged to almost double that level in the same session. Ten-year French government securities yielded 1.84 percent yesterday.

On investor flows:

“The BOJ’s bond purchases will tighten supply in the domestic market and may force investors to look overseas.”

“Investors are favoring French government bonds which have higher yields than German bunds and better fiscal standing than Spain and Italy.”

“U.S. mortgage-backed securities and Treasury notes up to three and five years in maturity may also be bought.”

On volatility:

“While we are seeing volatility in the JGB market after the BOJ decision, yields are unlikely to rise significantly in the longer term as 60 to 70 percent of the debt issued will be absorbed by the central bank.”

“In the domestic market, we have been recommending asset swaps since last year as a good way to manage risk.”

“Volatility may increase when the BOJ starts to contemplate an exit from stimulus, and swaptions are effective to hedge against those risks in a few years’ time.”

Ichikawa worked for Morgan Stanley Japan between 1999 and 2005 before moving to ABN Amro Securities, which was subsequently integrated into the Royal Bank of Scotland Plc. He rejoined Morgan Stanley Japan in 2009 to strengthen the firm’s rate strategy and advisory services and was appointed co-head of fixed income in Japan from January with Yukiko Hashimoto.

Hashimoto joined Morgan Stanley in 2008 as head of foreign-exchange sales for the Asia Pacific region including Japan.

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