BONDS: FX-Hedged Yields Remain Unattractive For Japanese Across Most Markets

In trend terms, Japanese investors continue to favour the safe haven status of U.S. Tsys and are willing to buy gilts on pullbacks, while they remain more cautious on EGBs.

• Across U.S. Tsys, the major EGBs and gilts, only BTPs offer a pickup vs. 10-Year JGB yields when rolling 3-month FX hedge costs are accounted for, although the gaps have narrowed in recent months.
• Japanese participants are relatively small players in the BTP market, with Japan’s monthly BoP data pointing to cumulative net selling of Italian paper in the 12 months through January.
• 10-Year OATs generate a small FX-hedged yield stepdown vs. 10-Year JGBs, which, when coupled with a political and fiscal uncertainty premium, may not make for an enticing investment offering for Japanese investors. Accordingly, BoP data shows Japan as net sellers of French bonds in 10 of the last 11 months.
• Japan is also a net seller of German paper over the last 12 months. The desire for looser fiscal policy in Germany is unlikely to reverse that trend in the short-term, although a further step up in yields could help entice Japanese participants when the German fiscal outlook becomes clearer.
• U.S. & UK bonds continue to benefit from Japanese inflows, with only fairly isolated rounds of monthly sales visible when going back over the last 12 months.
• Not all of these flows will necessarily be FX-hedged, given the stepdown in yields that hedging typically generates vs. JGBs.

Fig. 1: FX-Hedged Yields From The Perspective Of A Japanese Investor