Westpac: FX-Hedged Yields For Japanese Investors Look Attractive

Westpac note that “one important investor cohort that was not a big part of 2021s demand profile was the Japanese. That is perhaps understandable given the uncertainties around the global pandemic and the potential economic downside associated with Australia’s state lockdowns. Combined with the current geopolitical tensions and the upcoming tightening cycles, the current volatile price action risk aversion would not appear to provide an encouraging environment for an increase in support for AU bonds.”

• “However, recently we have noted a pickup in this demand. While nowhere near the levels seen in 2020, when demand for AU assets surged, there are signs that the surge in market rates since late last year is attracting yield seekers. Out to the 5-Year maturity, an FX-hedged yield pickup to JGB (the preferred approach of most insurance companies) sees AU bonds as the highest yielding alterative. Beyond that a country such as Italy provides a larger pickup but comes with greater risk. In addition, when we look at the history of these FX-hedged spreads to JGBs, we can see that for the 10-Year and 5-Year maturities, current pickups are at their historical highs, with 20-Year spreads not far off. That bodes well for further support over coming months, which we expect should benefit semis over ACGBs.”