Commerzbank Look To Readthrough Impact From BoJ Adjustment

In light of the BoJ adjustments Commerzbank note that “Japanese investors own over $2tn in foreign long-term debt, 55% in USD and 18% in EUR (end-2022 data). By far the largest euro area holdings are in France, and it is interesting to note that holdings in the Netherlands are about as large as in Germany, followed by Italy and Spain.”

• “Higher long-end JGB yields therefore give rise to bearish EGB steepening and OAT widening. However, what matters more to most Japanese investors than the yield difference over JGBs is the pick-up after FX-hedging. This has already turned significantly negative.”
• “This development is largely a function of the € curve flattening, which has overcompensated the higher yield difference, and looks set to level off as ECB rates reach their peak. After a potentially initially bearish reaction in long-end OATs we therefore do not expect a more lasting structural sell-off on the back of today's BoJ decision.”