Treasuries’ Biggest Foreign Buyers to Return on Weakening Yen


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(Bloomberg) — Japan’s giant investors are ready to bet on the yen’s weakness and boost their purchases of Treasuries for the rest of the year.

That’s the view of money managers in Tokyo, who see conservative buyers like life insurance companies helping reaffirm their position as the Treasury’s largest foreign holder after heavy selling in recent months. While yields on Japanese government bonds have climbed to a six-year high – the premiums offered by their US counterparts have risen even more as monetary policy in the two economies diverges.

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Some see the yen as being kept under pressure as the Federal Reserve raises interest rates. Already at a 20-year low, that would make dollar-denominated assets attractive to Japanese investors.

“Currency risk taking at this time is the safest way to generate returns at an already attractive yield,” said Tatsuya Higuchi, executive chief fund manager at Mitsubishi UFJ Kokusai Asset Management Company.

Japanese life insurers alone have more than $3 trillion in net assets, with buys and sells large enough to move Treasury yields on margin, so their annual investment plans will be closely monitored this month. They’ve been burned this year, along with other holders of the Treasury, with the Bloomberg gauge of securities down nearly 8%, on track for the worst decline since at least 1974.

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But an increase in Treasury yields is likely to hit levels attractive to Japanese buyers. The 10-year yield climbed above 2.8% this month on expectations of aggressive rate hikes, while the Bank of Japan has conducted unlimited bond-buying operations to prevent its market equivalent maturity yield from exceeding 0.25%.

currency call

A major focus for Lifars is the yen, which has fallen to its lowest since 2002 amid the lowest yield divergence and Japan’s position as an energy importer at a time of rising oil prices. The cautious guidelines can be seen that many insurers stick with currency hedging – a significant part of their investment decisions – but others are less constrained.

Consensus is building among Tokyo market watchers that the yen could widen losses to levels of 130 per dollar in the coming months before it stabilizes – a condition that interest rate divergence is expected to keep government officials close to the currency. will overtake attempts to return the key to the slide.

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The Yen’s Twenty-Year Low Just Started for Tokyo Traders

According to Hiroshi Yokotani, managing director of State Street Global Advisors in Tokyo, with the market considering that the cost of currency hedging will increase as the year goes on, there is a case for the Japanese to soon switch to net purchases of treasuries. .

“Japanese buyers got the timing wrong with the decline in US yields over the past few years while they waited for a rebound,” he said. “They may be buying since they were already high at the beginning of the fiscal year.”

‘Diversification’

Still, according to George Goncalves, head of US macro strategy at MUFG Securities Americas Inc. in New York, volatility in treasuries and hedge costs could see Japanese investors favor European government bonds, high-yield mortgages and US debt.

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Eichiro Miura, general manager of the fixed income division at Nisse Asset Management Corp. in Tokyo, echoed the idea.

“Diversification is a good option, investing in Europe where hedge costs are low, Australia where rate-growth is slow, or US credit where spreads remain attractive,” he said. “Or investors could add a little bit of weight to non-hedging treasuries.”

assured investment

Taking hedging costs into account, Japanese investors currently get a yield of about 1.6% from 10-year Treasury notes. The return on the Japanese equivalent is a tiny fraction of this, while the local 30-year yield is also less than 1%.

Higuchi at Mitsubishi UFJ Kokusai expects the Fed rate hike to bring more volatility to US bonds with shorter maturities and flatten the yield curve, making long-term Treasuries a “reassuring” investment for Japanese buyers.

Meanwhile, Asset Management One Company is 10-year long in the Treasury and expects the bond market to benefit as stocks struggle when the Fed shrinks its balance sheet.

“There’s more to gain than you lose at the Treasury,” said Akira Takei, global fixed-income money manager at the Tokyo-based firm, which oversees approximately $520 billion in assets.

©2022 Bloomberg LP

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