Japanese Funds Pile Into U.S., Europe Bonds Before Selloff

  • Investors boosted French holdings first time since October
  • Japanese funds bought Aussie debt for 13th consecutive month

Japan’s investors returned to developed bond markets in May, mopping up Treasuries, German bunds and French debt one month before a global selloff sparked by hawkish comments from major central banks.

Investors bought a net 1.32 trillion yen ($11.6 billion) of U.S. sovereign debt in May, the most in nine months, according to Japan’s balance-of-payment data released on Monday. Their return comes after they sold a record amount of the bonds in April. They also spent a net 906.4 billion yen to buy French and Germany debt.

Japanese investors are caught between keeping their money in domestic bonds, where rates have been suppressed by the Bank of Japan, and navigating markets in the U.S. and Europe where gyrating prices have led to losses and scrutiny from domestic regulators. Risk appetite returned after Emmanuel Macron won the French presidential election in May.

"Japanese investors needed to shift back to foreign debt to generate returns," said Masayuki Kichikawa, chief macro economist at Sumitomo Mitsui Asset Management Co. "The easing of political risks after the French presidential election is a big factor which prompted flows into European bonds."

Japanese investors were net buyers of German bonds for the first time in three months in May, snapping up 315.1 billion yen. They also bought a net 591.3 billion yen of French sovereign debt, the largest amount since July last year.

While last week’s global debt selloff may swing the sentiment again for Japan’s traditionally conservative fund managers, the BOJ has showed no signs of following other major central banks in thinking about unwinding stimulus. Instead, it brought yields down on Friday by offering to buy an unlimited amount of 10-year government bonds, and Governor Haruhiko Kuroda said Monday that the monetary authority will continue to adjust policy as needed.

"Investors will continue to seek yields by investing in foreign bonds selectively," Kichikawa said. "Financial institutions were key buyers of foreign debt in May, and they will continue to be key buyers as they can’t take risks by buying heavily into equities or take large foreign currency risks."

Australian sovereign bonds continued to enjoy steady inflows from yield-hungry Japanese investors, the data show. They bought a net 94.4 billion yen in May, a 13th consecutive month of purchases, the longest stretch ever, according to data compiled by Bloomberg going back to 2005.

Australia’s high credit rating status and the attractive bond yield levels relative to peers of developed nations are attracting steady inflows into the country, Kichikawa said.

  • Note: Sovereign bonds include those issued by governments, government agencies and local governments and with original maturities of more than one year
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