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Photographer: Kiyoshi Ota/Bloomberg
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In a Bond Market Gone Bonkers, Japan Is the New ‘High Yielder’

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In a Bond Market Gone Bonkers, Japan Is the New ‘High Yielder’

  • Investec’s Silberston is buying dollar-hedged Japanese debt
  • System can’t survive for long at such low yields: Silberston
Japan's New Emperor Naruhito Ascends Chrysanthemum Throne
Photographer: Kiyoshi Ota/Bloomberg

In the increasingly topsy-turvy world of bonds, Japan’s notoriously low yields are starting to look high for some investors.

While the Asian market is historically identified with poor yields and subdued trading thanks to decades of ultra-easy monetary policy, that perception is now being upended as a frenzied global debt rally squeezes returns elsewhere. Investec fund manager Russell Silberston favors a long position in Japanese bonds, which yield better than all of Europe’s highest-rated markets.

Japan's 10-year yield premium over Germany climbs to a record

“Japanese government bonds are now a global high-yielder, and hedged into dollars they are super attractive,” said Russell Silberston, a fund manager at Investec Asset. “It’s totally bonkers when JGBs look good.”

It’s been two decades since Japan pioneered zero rates and more than six years since the country’s central bank ushered in a record stimulus package. The country’s bond yields have descended into negative territory and Japanese investors have traditionally sought overseas assets for yield, but now fund managers like Silberston are going the other way.

Government debt yields in countries including Germany, the Netherlands, Austria, France and Belgium have already fallen below zero. The German five-year note currently offers -0.87%, compared with a comparable Japanese rate of -0.31%. Hedged into dollars, that gives a yield pickup of 40 basis points, according to Silberston.

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He had also bought long-dated securities in France but has now taken profit on the view that markets “are getting completely carried away.”

For Kacper Brzezniak, a portfolio manager at Allianz Global Investors, the interest-rate risk means Japan’s longer-maturity bonds still don’t look attractive. But he’s using short-dated Japanese debt hedged back into sterling as an alternative to holding cash.

Even as Silberston finds Japanese yields relatively appealing, he sees this dynamic flashing a warning signal about the state of the bond market. The last time Japan’s debt looked this attractive was in 1995, he said, which “tells us that the financial system cannot survive for long at these yield levels.”

(Adds Allianz fund manager comment in seventh paragraph.)