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Flows Into Offshore Bonds Still Modest By Historical Standards, Hedging Costs Coming Down

JAPAN DATA
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Local Japanese investors have stepped up their purchases of offshore bonds considerably in recent weeks. In the past 4 weeks we have seen ¥5.6trln in net purchases. This is the strongest run rate for such a period since early 2020 (when the Covid pandemic hit).

  • The first chart below plots the rolling 12 week sum of net flows into offshore bonds against the Bloomberg series for Global bond returns. On this longer dated metric, outflows have just returned to positive territory. This has also coincided with a more positive return for global bonds, with a number of central banks pivoting towards easing or signaling strong intent to do so (ex Japan).
  • Outflow momentum is well below previous cycle peaks though, so from a trend perspective may have more room to run. A lot will obviously depend on the Fed and how its actual rate cut easing cycle evolves relative to current market pricing.

Fig 1: Japan Purchases Of Offshore Bonds (12wk Rolling Sum) & Global Bond Returns

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Local Japanese investors have stepped up their purchases of offshore bonds considerably in recent weeks. In the past 4 weeks we have seen ¥5.6trln in net purchases. This is the strongest run rate for such a period since early 2020 (when the Covid pandemic hit).

  • The first chart below plots the rolling 12 week sum of net flows into offshore bonds against the Bloomberg series for Global bond returns. On this longer dated metric, outflows have just returned to positive territory. This has also coincided with a more positive return for global bonds, with a number of central banks pivoting towards easing or signaling strong intent to do so (ex Japan).
  • Outflow momentum is well below previous cycle peaks though, so from a trend perspective may have more room to run. A lot will obviously depend on the Fed and how its actual rate cut easing cycle evolves relative to current market pricing.

Fig 1: Japan Purchases Of Offshore Bonds (12wk Rolling Sum) & Global Bond Returns

Keep reading...Show less