There’s No Place Like Home: Japan Retreats From Global Bond RoutWes Goodman
The bond market rout is proving to be a blessing in disguise for Japanese government debt.
Investors in the nation sold 2.86 trillion yen ($24 billion) of bonds abroad in April, the first net sales this year, government data show. Money managers favoring local debt limited JGB losses 0.5 percent this quarter, data compiled by Bloomberg and the European Federation of Financial Analysts Societies show. Treasuries slid 1.7 percent and German bunds plunged almost 4 percent.
The resilience of JGBs reflects the heft of the nation’s 599 trillion yen in life insurance and pension assets. While these investors have been diversifying into stocks and global debt, their obligation to shield the world’s fastest aging population makes domestic sovereign debt the fallback asset of choice.
“When people are facing risk or uncertainty, Japanese investors start moving back to Japan,” said Hideo Shimomura, the chief fund investor in Tokyo at Mitsubishi UFJ Asset Management, which oversees the equivalent of $75 billion. “They will become more cautious on investing abroad.”
Benchmark 10-year notes yielded 0.375 percent as of 10:06 a.m. in Tokyo, rising from a record low of 0.195 percent in January. It’s still less than the average of 0.45 for the past year. Yields will be 0.2 percent to 0.3 percent by year-end, Shimomura said.
The local market is also benefiting as the Bank of Japan buys bonds to pump money into the economy, increasing its holdings by 80 trillion yen a year. The BOJ owned a quarter of the market at the end of 2014, central bank figures show.
Japanese government bonds offered a degree of safety as fixed-income securities plunged around the world, helping insurers and pension funds that are faced with keeping up their returns as the country ages. The population is growing older faster than any other developed country, according to a United Nations report in 2013.
Benchmark Treasuries and bonds from Germany to Australia began to falter in April as investors prepared for U.S. borrowing costs to rise. Federal Reserve Chair Janet Yellen fueled the decline by saying this month that “long-term interest rates are at very low levels.”
While there’s demand for Japanese bonds, the downside is that yields are too low, said Roger Bridges, the chief global strategist for interest rates and currencies at Nikko Asset Management Australia in Sydney, with the equivalent of $19 billion in assets.
“You start thinking, is this enough?” Bridges said. “Do I really want to hold these? Anything under 1 percent does look expensive.” Nikko Asset owns fewer Japanese bonds than the percentage in the benchmark it uses to gauge performance, he said.
U.S. 10-year Treasuries yielded 176 basis points more than same maturity bonds in Japan. The average has been 159 basis points for the past five years. A 10-year JGB sale last week drew the weakest bidding in six years, while demand declined at a 30-year auction.
Domestic investors who own about own about 90 percent of the local-currency market aren’t so eager to sell, according to Hiroki Shimazu, the senior market economist at SMBC Nikko Securities Inc. in Tokyo.
“The domestic share of the market is very large,” he said. “There’s a low relationship with the other countries. That supports the stability of the bond market.”
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