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As the Federal Reserve’s pledge to keep rates lower for longer diminishes returns on U.S. Treasuries, a Japanese bond fund sees the November presidential election as another reason to avoid them.

“Markets can become unstable as political noises get louder with the presidential election approaching,” Tatsuya Higuchi, executive chief fund manager at Mitsubishi UFJ Kokusai Asset Management Co. said. The firm’s ¥388.6 billion ($3.7 billion) flagship bond fund has reduced its Treasury holdings while adding Spanish and Australian sovereign debt.

The fund’s change in strategy comes amid signs of heavy supply weighing on demand for U.S. government debt, with estimates of more than $1 trillion in net bond sales through December. A three year bond auction last week saw muted demand.

Higuchi cited improvements in the Eurozone’s economy for raising its allocation to the region’s debt to near neutral from underweight. About 18 percent of the fund’s holdings now consist of Spanish bonds, the highest since it resumed investment in the country in 2018. Its overall allocation to the Eurozone has risen to 32.5 percent, approaching the benchmark weighting of 33.9 percent.

“We could easily increase positions in Spanish bonds as they continue to offer attractive spreads,” Higuchi said.

Bonds from the European Union are becoming popular among Japanese investors seeking higher returns, specially after a massive stimulus package was approved to help the economy recover from the impact of the coronavirus. Japanese funds bought record amount of Italian debt in July.

Meanwhile, Mitsubishi UFJ Kokusai’s Global Sovereign Open fund dropped its Treasury holdings to 35.4 percent as of Aug. 31, its lowest since Oct. 2014. It was at 39.2 percent in July. “No matter who gets elected, they’ll focus on fiscal policy to recover the economy ruined by the coronavirus and it may take a some time before we could confirm the key agenda from candidates,” he said.

The fund mainly invests in sovereign debt, from issuers of developed countries rated equal to or above A.

The fund also lifted its holdings of Australia’s sovereign bonds to 2.8 percent from 0.3 percent in January. According to Higuchi, Australian bonds offer relatively higher yields and it’s easier to increase exposure under the Reserve Bank of Australia’s yield targeting policy.

“Demand for natural resources could pick up and Australia could benefit from recoveries in China and other parts of Asia,” Higuchi said.

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