Ultra-Low Japan Yields Go Global as Hedged Yen Buying U.S. Bonds

  • Japanese investors bought record amount of Treasuries in March
  • JPMorgan sees ‘synchronization’ of Japan bonds, Treasuries

Japan is taking its ultra-low bond yields global as yen funds flock to U.S. Treasuries at the fastest pace ever.

Japanese investors were net buyers of long-term U.S. sovereign debt in April, after scooping up an unprecedented 5 trillion yen ($47 billion) in March, Ministry of Finance data show. That helped drive the cost to hedge their currency risks to the highest since the global financial crisis. Tohru Sasaki, JPMorgan Chase & Co.’s head of Japan markets research, sees “synchronization” of Japanese government bonds and Treasuries, as the Asian nation’s investors snap up whichever security offers the most yield after hedging.

“Japanese life insurers and banks are basically trying to combine the JGB market with the U.S. bond market,” Sasaki said in an interview on June 9 in Tokyo. “The people who are doing this are JGB investors, not foreign-bond investors, so it’s not like they will unwind their hedges if the cost gets higher. That won’t happen.” A hedged U.S. bond is effectively the same as Japanese currency debt for a yen investor because it takes away exchange-rate risk.

Negative Yields

Japanese banks and insurers have had to either buy longer-dated yen bonds or invest overseas after the Bank of Japan’s decision in January to implement a negative deposit rate pushed yields on domestic notes with up to 14 years to maturity below zero. Currency hedging shaves 1.3 percentage points off 1.6 percent benchmark 10-year Treasury yields, which still outstrip 30-year Japanese government bond yields that fell to an unprecedented 0.21 percent on Wednesday.

BOJ Governor Haruhiko Kuroda and his board decide policy Thursday, with about a quarter of analysts surveyed by Bloomberg expecting an expansion of stimulus. More than half of those polled predict action at the meeting in July.

Japan’s biggest life insurers increased their hedges against dollar declines in the six months to March 31, according to their latest earnings reports, even as the cost to do so climbed to the highest since February 2009 by one gauge. The measure has surged further since then, to levels unseen since December 2008.

Buying isn’t limited to Treasuries. Japanese investors have poured almost 12 trillion yen into foreign debt since February, with approximately 70 percent of that coming from life insurers and banks, according to Finance Ministry figures.

Never before have traders paid so much to own trillions of dollars in debt to get so little.

The yield on the Bloomberg Global Developed Sovereign Bond Index dropped to a record 0.58 percent this week. Germany’s benchmark yield Tuesday joined Japan’s and Switzerland’s below zero. Outside of Japan, the flattest sovereign yield curve among industrialized nations belongs to Canada.

“Japanese life insurers and banks are exporting Japan’s negative interest-rate policy,” said Sasaki.

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