Japan Buyers Sour on Hollande’s Record-Low French Yields

Japan’s biggest investors are turning sour on French government bonds after their purchases helped push yields to all-time lows.

Fukoku Mutual Life Insurance Co. and three other investors managing a combined $316 billion say their enthusiasm is waning amid a rally that saw France’s 10-year yields set a record-low close yesterday of 1.542 percent. Spanish and Italian bonds, and even U.S. Treasuries, offer yields that are about 1 percentage point higher.

Demand is ebbing after Japanese purchases of almost 2 trillion yen ($19.7 billion) of French debt in May, the most in data going back to 2005 based on the latest figures from Japan’s finance ministry and central bank. That’s a blow to President Francois Hollande, who needs the low yields to help drive growth in the world’s fifth-biggest economy. Gross domestic product will expand less than the government’s 1 percent target this year and unemployment will climb as consumer spending and exports fail to accelerate, according to the statistics office.

“I’m not interested” in French bonds, said Yoshiyuki Suzuki, head of fixed income in Tokyo at Fukoku Mutual, which has the equivalent of $59.2 billion in assets. “The yield shrank too much. We’re holding but not buying.”

Suzuki is focusing his purchases on the U.S. and the U.K., he said in a telephone interview on July 17.

Spanish Alternative

Hideo Shimomura, Mitsubishi UFJ Asset Management Co.’s chief fund investor in Tokyo, said he’s looking at Spanish bonds, where 10-year yields of 2.57 percent were 139 basis points more than benchmark German bunds as of 2:54 p.m. in London. The premium was 156 basis points for Italian securities.

French 10-year bonds yielded 39 basis points more than their German counterparts today. The spread contracted to 32 basis points in June, the narrowest in three years. France’s 10-year bonds fell, pushing the yield four basis points higher to 1.58 percent today.

“We like Spain and Italy more than France,” Shimomura said in a telephone interview on July 17. “Spain and Italy offer higher spreads.”

Mitsubishi UFJ has owned Spanish and Italian securities since European Central Bank President Mario Draghi pledged almost two years ago to do “whatever it takes” to preserve the euro as the currency union threatened to splinter, according to Shimomura. The company manages the equivalent of $78.9 billion in assets.

Better Returns

Spanish bonds returned 37 percent from the end of July 2012 through yesterday, and Italian securities gained 33 percent, based on Bloomberg World Bond Indexes.

French debt advanced 8.6 percent and Treasuries fell 0.7 percent, the figures show. The U.S. 10-year yield was at 2.52 percent today.

Hollande is seeking to revive Europe’s second-largest economy after two years in office. France’s GDP is set to expand 0.7 percent in 2014, the statistics office said last month, less than the 1 percent Hollande is counting on to create jobs and cut the budget deficit.

Draghi in June unveiled an unprecedented round of measures to push down borrowing costs and maintain growth in the 18-nation euro region, with the ECB becoming the first major central bank to take one of its main rates negative.

Kei Katayama, who manages foreign bonds as part of the $48.3 billion in assets at Daiwa SB Investments Ltd. in Tokyo, said he’s not ready to part with his holdings of French and other European bonds.

Draghi will have to do more to keep borrowing costs down and may resort to buying government debt, Katayama said.

‘Additional Easing’

“There’s a clear policy difference of the ECB against the Federal Reserve,” he said in a telephone interview on July 22. “The ECB may be forced to do additional easing.” In the U.S., “next year they should start tightening,” he said.

Mizuho Asset Management Co., which has the equivalent of $39.4 billion in assets, is neutral on French bonds. The company prefers Italy and Spain, Yusuke Ito, a portfolio manager at the company in Tokyo, said by telephone on July 22.

Diam Co. is also neutral on France, said Hajime Nagata, an investor for the Tokyo’s company’s $138.5 billion in assets. He trimmed holdings in May and prefers the debt of Ireland, Italy and Spain, he said in a telephone interview yesterday.

“I sold some French bonds,” Nagata said.

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