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Goldman: Foreign Short Mat Buying Supported By FX-Hedged Yield Pick-Up

JGBS

Goldman Sachs note that “the intense speculation and positioning around the potential for an adjustment to BoJ YCC at the June meeting saw the single heaviest week of foreign selling of Japanese bonds on record, as foreign investors net sold ¥4.81tn bonds in the week ending June 17. Since then, however, foreign investors have on net bought bonds every week but one, and while some of those purchases likely represent short covering, the buying has exceeded the amount sold in the first few weeks of June.”

  • “For some time, we have noted the relatively diminished appeal of foreign bonds - particularly U.S. Tsys - to Japan-based investors given high FX-hedging costs and the weakness of the yen (the latter being a key consideration for unhedged buyers). The flip side of this, however, is that the economics of JGBs for foreign (particularly USD) investors has improved on the back of much higher domestic policy rates and a stronger currency. For shorter maturities (inside of 5s), the risk-adjusted comparison to alternatives such as Treasuries or bunds is particularly appealing.”
  • “Monthly flows data appears to support this observation, as JSDA data suggests that even in June, foreign investors were net purchasers of JGBs in the 2- to-5-Year sector, with the aggregate selling driven by activity at the 10-Year point (reflecting aforementioned short positioning for YCC adjustments). While a resumption of a move higher in global yields and firmer domestic price pressures could lead investors to again question the sustainability of YCC, the relatively lower volatility and FX-hedged yield pick-up could continue to draw foreign interest at shorter maturities.”
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Goldman Sachs note that “the intense speculation and positioning around the potential for an adjustment to BoJ YCC at the June meeting saw the single heaviest week of foreign selling of Japanese bonds on record, as foreign investors net sold ¥4.81tn bonds in the week ending June 17. Since then, however, foreign investors have on net bought bonds every week but one, and while some of those purchases likely represent short covering, the buying has exceeded the amount sold in the first few weeks of June.”

  • “For some time, we have noted the relatively diminished appeal of foreign bonds - particularly U.S. Tsys - to Japan-based investors given high FX-hedging costs and the weakness of the yen (the latter being a key consideration for unhedged buyers). The flip side of this, however, is that the economics of JGBs for foreign (particularly USD) investors has improved on the back of much higher domestic policy rates and a stronger currency. For shorter maturities (inside of 5s), the risk-adjusted comparison to alternatives such as Treasuries or bunds is particularly appealing.”
  • “Monthly flows data appears to support this observation, as JSDA data suggests that even in June, foreign investors were net purchasers of JGBs in the 2- to-5-Year sector, with the aggregate selling driven by activity at the 10-Year point (reflecting aforementioned short positioning for YCC adjustments). While a resumption of a move higher in global yields and firmer domestic price pressures could lead investors to again question the sustainability of YCC, the relatively lower volatility and FX-hedged yield pick-up could continue to draw foreign interest at shorter maturities.”