Prudential Sees Bonds Pricing in BOJ Stimulus After Brexit

  • BOJ may push negative rates to minus 0.3 percent: Sakaguchi
  • U.K. vote may result in retreat from some European bank bonds

Japanese bond investors are moving to price in additional stimulus by the Bank of Japan after the U.K.’s vote to leave the European Union, according to Prudential Financial Inc.

All of the nation’s sovereign bond yields dropped below 0.1 percent for the first time on Tuesday, with the 30-year bond yield reaching a record 0.05 percent. The BOJ may cut its negative-deposit rate to minus 0.3 percent at its next policy meeting from minus 0.1 percent, and market speculation about such easing steps is boosting debt prices, said Kenji Sakaguchi, the chief investment officer at Prudential Investment Management Japan.

“Investors in super-long bonds are fearful about how far negative rates will extend,” said Sakaguchi, whose Tokyo-based firm managed the equivalent of about $178 billion at the end of 2015. “We’re likely seeing a move there to lock in positive yields early.”

Barclays Plc expects the BOJ to hold an unscheduled policy meeting before a planned gathering on July 28th and 29th in the wake of market turmoil triggered by Britain’s referendum, analysts including Kyohei Morita wrote in a note this week. BOJ Governor Haruhiko Kuroda declined to comment Tuesday on the possibility of a surprise monetary policy conference, after attending a government panel meeting that included Prime Minister Shinzo Abe.

Impromptu Meeting

“If an impromptu BOJ policy meeting isn’t called, then the probability increases for further easing in July,” Prudential’s Sakaguchi said.

The yield on benchmark 10-year Japanese government bonds has tumbled half a percentage point from the end of last year to a record minus 0.23 percent on Tuesday. The yield on the nation’s longest debt, a 40-year note, plunged as low as 0.065 percent.

Following the vote for a British exit, also known as Brexit, Sakaguchi said there may be a pullback by local investors in purchases of yen-denominated notes of some European financial institutions. The region’s banks are the biggest issuers in Japan’s Samurai bond market, with France’s Credit Agricole SA, Societe Generale SA and BPCE SA all selling debt since May.

Domestic corporate bonds sales since April have climbed about 7 percent to 2 trillion yen ($20 billion) compared with the same period a year earlier, and included issues from Japan’s biggest property developers and real estate investment trusts. Mitsubishi Estate Co. sold 15 billion yen in 40-year notes paying a coupon of 0.789 percent earlier this month, following a 250 billion yen subordinated debt deal in January.

“We think corporate bonds with good credit fundamentals that offer richer spreads and are less constrained by zero rates are attractive,” said Sakaguchi. “There is more comfort with domestically-focused sectors such as construction or real estate in this environment and their bonds will probably be preferred.”

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