Japanese Gobbling Up Aussie Debt Avoid Lower-Yielding Sovereigns

  • Purchases of non-government debt surge to seven-month high
  • Mitsubishi UFJ sees signs sovereign paper is relatively cheap

Japanese investors who went hunting for yield in Australian government bonds earlier this year are now turning to the nation’s state and corporate debt.

They snapped up 127.9 billion yen ($1.04 billion) of Aussie debt outside the sovereign market in September, a seven-month high, based on the most recent figures from Japan’s Ministry of Finance. That’s also more than four times the monthly average over the past five years.

Australia holds allure for Japanese investors even as the South Pacific nation’s government bonds ranked last among major peers over the past month. Investors from the world’s second-biggest debt market are migrating to Aussie non-sovereign paper as they face rock-bottom yields at home thanks to the central bank’s asset-purchase program.

“The beauty of those bonds is that there some spread against Commonwealth bonds,” said Yusuke Ito, a senior investor in Tokyo at Mizuho Asset Management, which has $40.9 billion in assets. “These are always safe, so this premium is a good opportunity for us to make some additional money. We try to maintain some exposure.”

Mizuho Asset holds Australian state bonds and Aussie-dollar securities issued by international development banks, Ito said. A gauge of Australian state and supranational debt has returned 2.4 percent this year, versus 1.9 percent for sovereign securities, according to Bank of America Merrill Lynch indexes.

Demand for the securities has narrowed the yield premium over government debt to 17 basis points from this year’s high of 29 basis points set in March, based on Standard & Poor’s data. The spread reached 14 in June 2014, the lowest on record in the data, which go back to 2005.

Investors in Japan are on the hunt for interest payments as their central bank gobbles up government debt to help spur the economy. Benchmark 10-year yields in the nation fell to 0.295 percent this month, which is 10 basis points way from the record low set in January. They can pick up more than 2.5 percentage points by buying Aussie 10-year debt instead of same-maturity Japanese bonds. The premium was as high as 2.65 points this month, the most in almost a year.

Tough Times

The downside is that Australian bonds are having a tough time. Government securities due in more than a year have fallen 1.5 percent in the last month, the biggest loss of 26 bond markets tracked by Bloomberg and the European Federation of Financial Analysts Societies. Reserve Bank Governor Glenn Stevens fueled the selloff when he surprised some investors on Nov. 3 by deciding against cutting interest rates and saying business conditions are improving.

Besides state and supra bonds, money managers are also snapping up interest-rate swaps. They’re willing to accept 15 basis points of extra yield to receive fixed payments from swaps instead of buying same-maturity government bonds. The spread was as narrow as 8 basis points earlier this month, the smallest in 12 years.

For Hideo Shimomura, the chief fund investor in Tokyo at Mitsubishi UFJ Kokusai Asset Management, narrowing swap spreads make government bonds increasingly attractive.

“We are bullish on government bonds relative to non-governments,” Shimomura said. “Government bonds are relatively cheap.” The company has $97.4 billion in assets.

Toshifumi Sugimoto, the chief investment officer in Tokyo at Capital Asset Management who has 30 years of experience trading bonds, favors a mix of state and federal bonds. 

“We are buying New South Wales or Queensland bonds,” he said. “State bonds are becoming more popular. People are looking for higher yields.”

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