Treasuries Just a Step Away From Welcoming Back the Japanese

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  • Yields of 2.40-2.50% could make Japanese active buyers: Sompo
  • Super-long bonds most attractive part of Japan curve: Nissay

Japanese investors say they are just a step away from boosting their Treasury holdings as the extra yield offered by the U.S. securities approaches the most in seven years.

A U.S. 10-year yield of around 2.40 to 2.50 percent could make the Japanese active buyers, said Shinji Hiramatsu, general manager of the fixed-income investment department at Sompo Japan Nipponkoa Asset Management Co., which oversaw the equivalent of $17.7 billion at the end of March. Nissay Asset Management Corp. and SMBC Nikko Securities Inc. echoed the comments.

Japanese demand for Treasuries has dipped this year as the U.S. benchmark yield fell to a 10-month low of 2.01 percent in September. The Federal Reserve’s commitment to raising interest rates and optimism over U.S. tax reforms has since revived the so-called reflation trade, pushing the 10-year yield as high as 2.37 percent on Monday.

“The U.S economy is expected to remain strong, but there is a possibility that the economy will see a peak next year so it’s possible that the bond yields may not rise too sharply,” Tokyo-based Hiramatsu said. “This will reduce the chance of being hit by capital losses as yield increases will be limited. Given such a perception, Japanese investors may buy U.S. Treasuries on price falls.”

At current yields, U.S. 10-year notes offer 2.28 percentage points of more than similar-maturity Japanese government bonds. The spread widened to 2.54 percentage points in March, the most since April 2010. Japan was overtaken by China as the largest foreign owner of Treasuries in June, after its holdings dropped by $20.5 billion from May.

Japan’s benchmark 10-year bond yield is unlikely to exceed 0.1 percent given the central bank’s yield-curve control policy, meaning overseas securities are becoming more attractive, said Eiichiro Miura, general manager of the fixed-income investment department at Nissay Asset Management, which oversaw the equivalent of $93.8 billion on March 31. The yield was at 0.075 percent Tuesday.

Fewer JGBs

“Domestic investors could allocate less to JGBs if overseas bond yields climb,” Tokyo-based Miura said. “Japanese investors could start buying U.S. Treasuries if the 10-year yield stabilizes.”

The only area of the Japanese yield curve that offers interest is the super-long sector, which is beyond the scope of the central bank’s policy. Japan’s 30-year bond yields 0.875 percent, and the 40-year is at 1.08 percent.

The current yield levels of Japan’s super-long bonds look attractive but buying interest will slow if the U.S. 10-year yield climbs to 2.50 percent, Miura said.

The benchmark Treasury yield will rise to 2.60 percent at the end of March, according to the median forecast in a Bloomberg survey of analysts.

Here are comments on other issues affecting the outlook for Japanese bonds and Treasuries from Japan fund managers and strategists:

U.S. Treasuries

  • Japanese life insurers lack new money, but if U.S. 10-year Treasury yields advance to 2.40-2.50% then they may allocate funds by not hedging currency exposure, says Hidenori Suezawa, chief fixed-income strategist at SMBC Nikko Securities in Tokyo

Japan Government Bonds

  • Yield curve in the super-long sector is more likely to steepen, says Koichi Sugisaki, a strategist at Morgan Stanley MUFG Securities in Tokyo
    • 20-year bonds will come under selling pressure if yields fall to 0.5%, while they will gather buying interest if it rises to 0.6%,
  • Japanese investors have little interest in buying JGBs as yields are kept around zero, SMBC Nikko’s Suezawa says
    • They are expected to limit purchases to a minimal amount

Japan’s Election

  • “Unless you see a defeat of the ruling party at the election, there will be few incentives in Japan, while more focus needs to be placed on the situation in the U.S.,” Morgan Stanley’s Sugisaki says
    • 80-90% chance for the Abe administration to retain power, but if his party loses 40 to 50 seats then concern about his leadership could grow
  • The market is turning nervous about the election, SMBC’s Suezawa says
    • Abe’s government can retain its majority but if he loses badly then it could be difficult to pursue Abenomics and this could affect the appointment of the next BOJ Governor
  • The market is starting to worry about Abenomics coming to an end, although this doesn’t mean bond yields will start to rise, said Eiji Dohke, chief bond strategist at SBI Securities
    • BOJ’s monetary policy is not expected to change even if Abe loses the election and the ruling government loses power
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