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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."