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Japan Funds Reluctant to Buy Local Debt After Selling Abroad

  • ‘Superlong bond yields still have room to rise’: MassMutual
  • Japanese investors sold foreign bonds for two straight weeks

The tide of money flowing out of Japan has turned, but the nation’s investors say it’s too early to dive back into their own debt.

Domestic investors sold overseas bonds for two straight weeks in the latest data from the Ministry of Finance for only the second time this year. That ended a 10-week run of net purchases, the longest stretch since the start of last year. Some of Japan’s biggest funds including Mitsubishi UFJ Kokusai Asset Management and Massachusetts Mutual Life Insurance Co. say longer-term yields at a six-month high still aren’t high enough as they bet the worst rout in the securities for a decade has further to run.

“We’ve seen a sizable retracement in 20-year yields, but they are still not at levels where investors can be comfortable buying in a stable way,” said Masayuki Koguchi, the chief yen-bond fund manager at Mitsubishi UFJ Kokusai Asset in Tokyo. “Investors want a little bit more. They want to see the yield curve get a little bit steeper.”

Japanese investors had rushed overseas this year in search of better returns after Bank of Japan stimulus drove yields on tenors as long as 20 years negative. Now the nation’s debt is leading a global selloff amid speculation the central bank will decide to limit buying of the securities as soon as the policy meeting ending Wednesday.

BOJ Governor Haruhiko Kuroda acknowledged this month that low long-term yields hurt returns on pension and insurance investments. The 20-year Japanese government bond yielded 0.425 percent on Tuesday. It was around 1 percent at the start of the year. The tenor had become a bastion in the domestic market for investors seeking to balance returns with liquidity, with 10-year yields languishing below zero for more than six months.

The yield curve as measured by the spread between five- and 40-year securities -- Japan’s longest tenor -- narrowed to below 36 basis points in June. The gap stood at around 80 basis points, from nearer to 135 basis points at the beginning of January.

“It’s not as if Japanese funds wanted to ditch yen bonds and invest abroad, we were forced to by ultra-low yields,” said Jun Fukashiro, a senior fund manager in Tokyo at Sumitomo Mitsui Asset Management. “It’s highly likely investors will return if the curve steepens. The rise in long-term yields is not a bad thing. It’s healthy.”

For a QuickTake on the BOJ’s quest for 2 percent inflation, click here.

JGBs maturing in more than a decade have slumped 5.8 percent since the end of June, on track for their worst quarter since an 8.3 percent rout in the same period of 2003, according to Bank of America Merrill Lynch indexes. By contrast, debt maturing in one to 10 years has declined 0.6 percent in the past 2 1/2 months.

Massachusetts Mutual Life says it will consider buying the 40-year security when the yield climbs to 0.75 percent, from 0.635 percent late Friday in Tokyo. That would still be only about half of what it yielded a year ago.

“Superlong bond yields still have room to rise,” said Satoshi Shimamura, the firm’s head of rates and markets for the investment strategy department. “Another wave of selling could be coming. Now is not the time to buy.”

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