Photographer: Tomohiro Ohsumi/Bloomberg

Japan’s Second-Biggest Bond Fund Doesn’t See Value in Yen Debt

  • ‘Very hard to put more money into JGBs now,’ MUFJ Kokusai says
  • Yields on 10- and 20-year bonds dropped to records Monday

For Japanese fund managers trying to squeeze yield from their nation’s sovereign debt market, 20-year bonds have become a bastion. Now one gauge shows those too are becoming prohibitively expensive.

Tatsuya Higuchi, who manages the flagship sovereign debt fund at Mitsubishi UFJ Kokusai Asset Management Co., said he looks at the Japanese government bond market’s implied yield for the 10-year benchmark in 10 years’ time and then compares it to long-term averages to decide whether it’s worth buying the longer-dated notes.

“The expected return has become very low, so it’s actually very difficult to put more money into JGBs now,” Higuchi, whose Global Sovereign Bond Fund is ranked by Morningstar Inc. as Japan’s second-biggest by assets, said in an interview on June 8 in Tokyo. “Maybe we’ll go to another currency."

Japanese banks, pension funds and insurers have been forced to buy longer-dated debt as almost 80 percent of JGBs currently have negative yields. The yield on the 10-year Japanese government bond plunged to a record low of minus 0.165 percent Monday, while that on the 20-year security slumped to an unprecedented 0.17 percent. Bank of Japan Governor Haruhiko Kuroda, who is buying sovereign bonds and charging banks fees on some of their reserves, will have another opportunity to boost stimulus at a meeting ending Thursday.

Several Steps

Higuchi’s valuation involves several steps. Because buying a 20-year bond is like buying two 10-year bonds in succession, it is possible to look at prevailing yields and then calculate what the second 10-year bond needs to yield to make them equivalent. The implied yield -- called the 10 year, 10-year forward rate -- slid to a record 0.52 percent Friday. The final step is comparing it to average historical yields.

Higuchi’s line in the sand for the forward rate lies about halfway between the average yields on the 10-year and five-year notes since the 2008 financial crisis. It’s bumping against that line now, spurring the fund manager to sell a small amount of 20-year JGBs last week, even as he continues to favor the tenor as offering the best balance of yield and liquidity. Further declines in 20-year JGB yields could still make the bonds more attractive, as long as they’re accompanied by an even bigger drop in 10-year yields.

Higuchi said he hadn’t decided what to do with the proceeds from the sale of 20-year bonds last week.

"We still like longer tenors of U.S. dollars,” he said.

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