As Much as Japanese Love Treasuries, Yen Bonds Are Safer

For Japanese investors who are snapping up Treasuries, the outlook for yields suggests they’d be better off keeping their money in bonds at home than buying more now.

Ten-year Japanese government yields will rise to 0.47 percent by year-end from 0.36 percent Wednesday, according to a Bloomberg survey of economists. While bond prices would fall, the loss would be less than 1 percent after accounting for interest payments. For Treasuries, the forecast is for an increase to 2.56 percent from about 1.88 percent, for a 4 percent loss, based on data compiled by Bloomberg.

Japanese investors have been gorging on Treasuries as they seek higher yields than they can get at home. There’s a risk prices for the U.S. securities will drop and yields will climb if the Federal Reserve raises interest rates, in contrast to the Bank of Japan’s efforts to support its market. A dollar rally that helped boost yen-based returns is losing momentum.

“If you don’t like to take risk, you should keep your money in Japan for a while,” said Kazuaki Oh’e, a debt salesman at CIBC World Markets Japan Inc. in Tokyo. “Not many investors are eager to purchase” Treasuries now, he said.

U.S. 10-year yields that have been less than 2 percent for most of the past two weeks are especially unattractive to Japanese investors, Oh’e said.

The extra yield the notes offer compared with same-maturity bonds in Japan was 1.53 percentage points, narrowing from 2 percentage points as recently as September.

Pressuring Yields

The BOJ is boosting its bond holdings by about 80 trillion yen ($668 billion) a year, bringing yields on debt due in as long as five years down to almost zero.

The central bank’s purchases are equivalent to about 90 percent of the government’s debt sales, creating a shortage of supply.

Twenty-two of 34 economists in a Bloomberg survey conducted March 31 to April 3 predict BOJ Governor Haruhiko Kuroda will expand the stimulus program by the end of October.

The Fed will raise U.S. interest rates in about eight months, a Morgan Stanley index shows.

Japan has amassed $1.2386 trillion in U.S. debt, pulling to within $1 billion of China as America’s largest foreign creditor, according to Treasury Department data.

The investment has returned 25 percent to yen-based investors in the past year, after taking into account the rally in the dollar. That’s the most among 26 bond markets tracked by Bloomberg and the European Federation of Financial Analysts Societies.

JGBs Underperformed

Figures like that are too enticing for some investors to pass up, compared with a 3 percent gain for JGBs in the period.

“U.S. Treasuries are better than JGBs because yield levels are high,” said Hideaki Kuriki, a fund manager in Tokyo at Sumitomo Mitsui Trust Asset Management, which has the equivalent of $56 billion. “Volatility is high, so you have a chance to make money. JGBs will not move much. There’s no chance to make money.”

Beside the risk of rising yields, Japanese holders of Treasuries face the possibility that the dollar will weaken against the yen.

The rally that strengthened the greenback 11 percent over the past six months is fading. The U.S. currency is little changed in April as of Wednesday. Bloomberg surveys project the greenback will gain almost 5 percent against its Japanese counterpart in the coming 12 months.

“There are more types of risk for Japanese investors to invest in U.S. Treasuries than JGBs,” said Naruki Nakamura, the head of fixed income in Tokyo at BNP Paribas Investment Partners Japan. Its parent company manages or advises on the equivalent of $558.3 billion. “So long as the Bank of Japan’s policy remains the same, we think the upside for JGB yields, and also the volatility for JGB yields, should be limited.”

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