Photographer: Dhiraj Singh/Bloomberg

Japanese Fleeing Negative Rates Take Refuge in Indian Yields

  • Rupee Uridashi issuance climbs to record $1.45 billion in 2016
  • One-month rupee volatility plunges to lowest since 2008

Japanese household investors are buying rupee-linked bonds like never before as negative interest rates at home prompt them to take greater risks in search for yield.

QuickTake Negative Interest Rates

The amount of Uridashi notes sold in the Indian currency surged to a record $1.45 billion this year from 105 offerings, making up 6.2 percent of the total issuance, and surpassing Turkey and New Zealand to enter the top five target nations. The rupee is projected to climb 8.1 percent against the yen by the end of 2017, the most in Asia, according to surveys of analysts by Bloomberg.

“Pull factors like the improving India growth outlook and relatively attractive yields are driving Japanese investors to such debt,” said Kaushik Rudra, Singapore-based head of rates & credit research at Standard Chartered Plc. There are also “push factors such as the low-yield environment globally and accommodative monetary policy,” he said.

The fastest growth among the world’s major economies, Asia’s second-highest sovereign yields and a stable currency have made India the top pick for several emerging-market investors, including Mark Mobius of Franklin Templeton Investment Funds. BlackRock Inc., the world’s largest money manager, has been increasing positions in local bonds.

Rupee uridashi issuance this year is almost double the $783 million for all of 2015, with offerings from international lenders including Credit Suisse AG and HSBC Bank Plc. In 2014, the currency accounted for just 0.5 percent of total sales of the securities, which are issued outside Japan and sold directly to the nation’s household investors.

Prime Minister Narendra Modi has burnished India’s appeal through policy changes aimed at boosting growth and improving public finances. Gross domestic product rose 7.1 percent in April-June from a year earlier, while Japan’s economy grew an annualized 0.7 percent in that quarter.

Global holdings of rupee-denominated government and corporate notes in India climbed for a fourth day on Tuesday, making it the longest stretch of increases this month, to 3.47 trillion rupees ($51.9 billion), according to data from the National Securities Depository Ltd. The rupee was little changed at 66.8250 per dollar in Mumbai on Wednesday.

The rupee’s total return this half against the U.S. dollar and the yen is 3.3 percent and 4.7 percent respectively, second only to the Indonesian rupiah in Asia. At 4.63 percent, the currency’s one-month implied volatility has plunged to the lowest since 2008 and is the least among emerging-market exchange rates tracked by Bloomberg, barring the yuan. Investors are seeking such stability as rising odds of a U.S. interest-rate increase this year weigh on developing-nation assets.

“Investors may prefer rupee uridashi because India’s recent performance is better than other high interest-rate currency countries, implying that the risk of rupee might be lower than other currencies,” said Toru Suehiro, senior market economist at Mizuho Securities Co. in Tokyo. “We expect the Federal Reserve to keep interest rates quite low and emerging currencies to keep their value without outflows to the U.S.”

Risk Appetite

India has been benefiting from sub-zero rates in developed nations. After falling 100 basis points this year, the 10-year sovereign bond yield is still the highest among Asian markets after Indonesia. It fell one basis point to 6.76 percent in Mumbai on Wednesday. Similar-maturity notes offer a negative 0.074 percent in Japan and 1.77 percent in the U.S.

JPMorgan & Chase Co. says Japanese demand for rupee debt could be at risk if cooling inflation causes the Reserve Bank of India to adopt a dovish policy. A monetary policy panel on Oct. 4 cut the benchmark rate to the lowest in more than five years, and official data later showed consumer-price gains slowed to a 13-month low in September.

“The attractiveness of absolute levels of carry is important for retail appetite for this asset class,” said Junya Tanase, chief foreign-exchange strategist at JPMorgan in Tokyo. “Heightened risk-off sentiment, which will possibly be triggered by various events, should hurt the risk appetite" of Japanese individual investors, he said.

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