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BONDS
The recent failure of 10-Year U.S. Tsy yields when it comes to breaching the 3.00% yield marker is generating some discussion re: the formation of a potential short-term top in the space. Could that be enough to lure Japanese investors back into the international bond space?
- Japanese investors have been relatively neutral when it comes to net flows surrounding foreign bonds over the first two full weeks of the new Japanese FY.
- While there are plenty of FX-hedged yield pickups on offer for Japanese investors there are several matters that we should be aware of.
- A 3-month FX-hedged approach to investments may allow the Japanese investor base to be nimble enough to deal with market gyrations, while evading the more extreme hedging costs related to longer horizons. However, this may note provide a long enough horizon for the investor base to deploy meaningful levels of capital.
- Other factors that may mitigate the potential for the deployment of Japanese capital offshore include the relative steepness of the JGB yield curve (aided by the BoJ’s commitment to its current YCC settings), the risk of the well-documented global inflationary pressures become more entrenched & impacting yields, prolonged BoJ easing impacting the cost of the roll of FX-hedging if investors decide to hold a position for longer than initially expected and the threat of continued market vol.
- Focus now moves to the semi-annual investment intentions declarations from the Japanese life insurer community, which should cross over the next couple of weeks.
- Note that the following tables & charts use 3-month FX hedging costs from the perspective of a Japanese investor.
| FX-Hedged Yield For Japanese Investor (%) | Conventional Yield (%) | FX-Hedged Pickup Vs. 10-Year JGB Yields (%) | |
|---|---|---|---|
| U.S. 10-Year | 1.5759 | 2.8532 | 1.3249 |
| Germany 10-Year | 1.2669 | 0.8550 | 1.0159 |
| France 10-Year | 1.7451 | 1.3340 | 1.4941 |
| Italy 10-Year | 2.9188 | 2.5080 | 2.6678 |
| Spain 10-Year | 2.2113 | 1.8000 | 1.9603 |
| UK 10-Year | 0.6508 | 1.9150 | 0.3998 |
| Australia 10-Year | 2.1848 | 3.0637 | 1.9338 |
| Japan 10-Year | -- | 0.2510 | -- |
| Japan 20-Year | -- | 0.7650 | -- |
| Japan 30-Year | -- | 0.9650 | -- |
| Japan 40-Year | -- | 1.0500 | -- |
Fig. 1: Selected FX-Hedged Sovereign Bond (From The Perspective Of A Japanese Investor) & JGB Yields (%)
Source: MNI - Market News/Bloomberg
MNI London Bureau | +44 0203-865-3809 | anthony.barton@marketnews.com
Why MNI
MNI is the leading provider
of intelligence and analysis on the Global Fixed Income, Foreign Exchange and Energy markets. We use an innovative combination of real-time analysis, deep fundamental research and journalism to provide unique and actionable insights for traders and investors. Our "All signal, no noise" approach drives an intelligence service that is succinct and timely, which is highly regarded by our time constrained client base.Our Head Office is in London with offices in Chicago, Washington and Beijing, as well as an on the ground presence in other major financial centres across the world.
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