Rising yields are creating buying opportunities in global bond markets, but Japanese investors are likely to stay home.

Japan’s 20-year securities offer a volatility and currency hedged-adjusted yield that’s more than twice that of Treasuries for Japanese investors, according to a Bloomberg analysis. The yield also outstrips that on high-yielding notes from Italy, and outperforms those of six other developed markets.

Japanese bonds have largely escaped the rout that has jolted other debt markets as the central bank’s ultra-loose monetary policy keeps yields locked in a narrow range. The investment patterns of Japan’s funds are worth watching given the Asian nation’s position as the world’s largest net creditor.

"Because the Bank of Japan effectively guarantees a trading range, contrarian trades work well for Japan’s bonds,” said Akio Kato, general manager of strategic research and investment at Mitsubishi UFJ Kokusai Asset Management Co. in Tokyo. Such circumstances "reduce the incentive to buy overseas bonds.”

This preference is reflected in the latest official data. Japanese funds’ net purchases of foreign bonds dropped 87% to ¥2.6 trillion ($22.8 billion) last year. In contrast, they bought ¥25.7 trillion of domestic sovereign debt, the most since 2012.

While yields adjusted for currency hedging point to a premium for U.S. Treasuries, that picture changes when volatility is also taken into consideration.

The ratio of yield-to-volatility is computed by subtracting the rolling three-month currency hedging costs from 10-year bond yields and dividing the figure by the 60-day yield volatility. In the case of Japan, 20-year yields are used as the BOJ keeps 10-year yields anchored around zero.

The ratio measures the risk-reward for investors. A higher reading means fund managers can earn higher yields relative to the risks that they take.

Japan’s ultra-loose policy has effectively killed off the volatility in its bond market, with benchmark tenors recording no trades during several episodes in June, August, September and December last year.

It isn’t just domestic funds that favor Japanese bonds. Overseas investors scooped up a record net ¥12.4 trillion of Japanese debt last year as they sought refuge from policy normalization in major economies. The nation’s securities outperformed their developed-market peers in 2021 on a currency-hedged basis.

Policy expectations have helped anchor Japanese securities, with most economists forecasting that the BOJ will stand pat this year, while other central banks start to withdraw stimulus. The nation’s benchmark 10-year yields briefly jumped to 0.155% this month, the highest in almost a year, amid talk that policy makers were weighing an eventual move away from the low interest-rate regime.

BOJ Gov. Haruhiko Kuroda has since quashed the speculation, saying "raising rates is unthinkable.”

"Although global financial markets remain unstable amid ongoing risk-off moves, uncertainty around BOJ policy has decreased and should encourage buybacks in the JGB market,” Shinji Ebihara, a strategist at Barclays PLC in Tokyo, wrote in a Jan. 20 research note.