TD Securities suggest that "The outlook for...>

JAPAN: TD Securities suggest that "The outlook for Japan's foreign bond buying

for the remainder of 2018 looks uninspiring based on historical fund flow data.

1 factor that helps to explain the historical year-end drop in foreign bond

purchases is the rise in FX hedge costs. XXXJPY hedge costs have shot higher

again, materialising earlier than exp. this year. Although Japanese Lifers have

been more active in embracing a FX open policy, we sense a shift in policy is at

hand with Japanese Lifers increasingly likely to assess foreign bond purchases

on an FX hedged basis going ahead. The key catalyst for this shift in FX hedge

policy is the jump in longer dated JGB yields. As JGBs become more attractive

for Lifers, foreign bond investments will need to be assessed on an FX hedged

yield basis to offer a like for-like comparison. Should JGB yields edge higher &

the JGB curve steepen, this is likely to see interest in offshore bond markets

drop & if the rise in JGB yields is sustained, this is likely to shift global

interest rate term structures higher. If FX hedge costs matter once again,

history suggests adopting a bearish rates outlook. US 10yr FX hedged yield moved

into negative territory for Japanese investors last week."