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Global funds turned net sellers of Japanese government bonds last year as exceptionally low volatility reduced trading opportunities and as they poured money into supersafe treasury bills.

Overseas investors offloaded a net ¥2.79 trillion ($26.5 billion) of JGBs, the first drop since 2013, according to the latest balance-of-payments data. They still bought a total of more than ¥3 trillion of other types of Japanese debt — including bonds issued by government agencies, local governments and other entities — and a record amount of treasury-discount bills.

“Low yields and low volatility reduced speculative flows into long-dated debt aiming for capital gains,” said Naoya Oshikubo, a senior economist at Sumitomo Mitsui Trust Asset Management Co. in Tokyo. Foreign investors must have bought nongovernment debt “to profit from credit spreads and also due to speculation the spreads would shrink.”

Japan’s was the only government bond market globally to post an annual loss last year. The Bank of Japan’s yield curve control policy kept central bank bond purchases in check even as the government increased planned issuance to a record amount. The resulting rise in long-end yields saw the gap between the 10- and 30-year yields widen by the most since 2012.

Investors in Japanese government bonds are now wary of the BOJ’s policy review, the results of which are due for release in March. Speculation is growing that the central bank will cut back debt purchases to let the benchmark 10-year yield fluctuate in a wider range.

Global funds did manage to keep pace with an explosion in issuance of short term debt, however. As the amount of T-bills outstanding surged 86% last year, foreign purchases climbed to a record ¥21.4 trillion.

“Foreigners could have shifted to shorter-duration T-bills to reduce risks” at the height of the pandemic, said Shuichi Ohsaki, chief rates strategist at Bank of America.

Ohsaki expects global funds will support JGBs this year, though he does see a risk of more steepening in Japan’s yield curve if demand weakens further.

Preliminary figures from the finance ministry showed overseas investors bought a net ¥486.7 billion of Japanese bonds in January, though no asset-class breakdown is available.

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