Skip to main content

Japan Should Be Buying $300 Billion Treasuries

This is a timely article. Yes, Japan looks to be on track to buying another $300bn of Treasuries this year alone. Largely thanks to the almost zero yield on Japanese government bonds. That will further support USD strength and depress the yen. But more importantly, it will actually give room for further QE and may actually delay the raising of rates by Fed, particularly should China follow in Japan's strategy.

-------------------------------


Bloomberg - Yields on Japanese debt have been pinned near zero ever since the Bank of Japan embarked on its latest attempt, in April 2013, to end the two decades of stagnation that followed those go-go years. Europe isn’t much of an option, as yields turned negative this year on the region’s own quantitative easing. 

So why the U.S.? For one, with the Federal Reserve poised to raise interest rates, Treasuries offer the highest yields among debt from the world’s most-industrialized economies. Then there’s the dollar, whose meteoric rise against virtually every currency has made U.S. assets even more appealing. HSBC Holdings Plc says Japanese investors may funnel $300 billion into Treasuries over the next two to three years, double the pace of the nation’s purchases since 2012. 

“The BOJ is crowding out private investors,” said Yusuke Ito, a fund manager at Mizuho Asset Management, which oversees $33 billion in Tokyo. “They have to find alternatives.” 

Mizuho’s overseas bond unit, which stepped up buying of Treasuries in mid-2014, has signed up more clients looking for higher-yielding alternatives to Japanese debt, he said. 

Japan first began to exert its influence in the U.S. government bond market more than three decades ago, when its booming export-driven economy produced trade surpluses that it then plowed into Treasuries year after year. 

Creditor Nation 

Japan has since built a stake of $1.23 trillion, making it America’s second-largest overseas creditor, just behind China’s $1.24 trillion. 

For the U.S. government, maintaining Japanese demand in the $12.6 trillion market for Treasuries is more important than ever, particularly after China pared its own holdings last year by the most on record and as the Fed prepares to raise rates. 

The good news is that Japanese purchases are poised to accelerate. Of the $500 billion that investors will pull from Japan’s debt market to put abroad through 2017, about 60 percent will flow into Treasuries, said Andre de Silva, HSBC’s Hong Kong-based head of global emerging-markets rates research. 

Much of the allure has to do with the U.S. tightening monetary policy at a time when more than a dozen nations around the world are cutting rates or increasing stimulus to boost growth. The European Central Bank this month followed Japan in buying government bonds to pump money into its economy. 

Yield Premium 

As a result, 10-year Treasuries yielded as much as 1.2 percentage points more than the average for Group of Seven countries last week, the biggest premium since 2006. 

Compared with German bunds, the advantage reached the most in more than 25 years. The U.S. 10-year note yielded 2.09 percent as of 7:20 a.m. in New York. 

“U.S. Treasuries are more attractive than other markets,” Yoshiyuki Suzuki, the head of fixed income at Fukoku Mutual Life Insurance Co., which oversees about $52 billion, said from Tokyo. Fukoku has lifted its foreign bond holdings, composed mostly of Treasuries, to more than 20 percent of assets at the end of December, from about 18 percent a year earlier, he said. 

And it’s not as if investors in Japan have much choice at home. Under Governor Haruhiko Kuroda, the BOJ is buying 80 trillion yen ($659 billion) of debt a year, pushing down yields and constricting available supply. 

The BOJ already owns more than 20 percent of Japan’s government bonds. At least 60 percent of the $8.28 trillion market, including notes due as far out as a decade, yield less than 0.5 percent, data compiled by Bloomberg show. 

Forced Out 

“They are forcing everybody out of JGBs and into something that’s higher yielding,” John Gorman, the head of dollar interest-rate trading for Asia and the Pacific at Nomura Holdings Inc., Japan’s largest brokerage, said from Tokyo. Treasuries will be among the biggest beneficiaries, he said. 

Japan Post Holdings Co., the largest owner of the nation’s bonds after the central bank, and Government Pension Investment Fund, are already making the shift. Together, they hold about 218 trillion yen of local debt, equal to $1.8 trillion. 

The banking unit of state-owned Japan Post increased its holdings of dollar-denominated debt more than 40 percent to 7.12 trillion yen in the fiscal year ended March 2014. 

GPIF plans to boost overseas bonds to 15 percent of its 137 trillion yen in assets from 11 percent to boost returns, and trim its allocation to Japanese debt. Spokesmen at both companies declined to comment on their holdings of Treasuries. 

Buying Power 

Hideo Shimomura, the chief fund investor at Mitsubishi UFJ Asset Management, which oversees $66 billion, says he’s not about to dump his Japanese bonds for Treasuries. That’s because the central bank’s bond buying will cause prices to appreciate and more than make up for the low interest payments. 

“The BOJ purchases are powerful and will completely support the market,” he said from Tokyo. “People may come back to JGBs. I don’t think the market will become bearish.” 

Japanese government bonds, which have fallen in March and February, posted their biggest annual returns since 1999 last year, index data compiled by Bank of America Corp. show. 

The Fed’s rate increases, which traders anticipate will start by September, may also leave Treasury investors vulnerable to losses. Forecasters surveyed by Bloomberg say 10-year yields will rise to 2.7 percent in the coming year as the Fed boosts borrowing costs, based on the median estimate. 

If that happened, it would result in a loss of about 2.4 percent for note holders, data compiled by Bloomberg show. 

Dollar Yen 

The dollar’s advance against the yen may far outstrip the losses from any rise in yields. 

For yen-based investors, the U.S currency’s appreciation boosted returns on Treasuries to 17 percent over the past six months, the most among 26 bond markets tracked by Bloomberg and the European Federation of Financial Analysts Societies. 

The greenback is forecast to climb 4.6 percent further against the yen in the coming year. 





“Investors will buy high-yield and high-quality bonds,” Hideaki Kuriki, a fund manager at Sumitomo Mitsui Trust Asset Management, which oversees $40 billion and bought U.S. 10-year notes this month, said from Tokyo. “That’s Treasuries.” 




Comments

Lay Hau said…
who's this pretty?

Popular posts from this blog

My Master, A National Treasure

REPOST:  Its been more than two years since I posted on my sifu. This is probably the most significant posting I had done thus far that does not involve business or politics. My circle of close friends and business colleagues have benefited significantly from his treatment.


My Master, Dr. Law Chin Han (from my iPhone)

Where shall I start? OK, just based on real life experiences of those who are close to me. The entire Tong family (Bukit Kiara Properties) absolutely swear that he is the master of masters when it comes to acupuncture (and dentistry as well). To me, you can probably find many great dentists, but to find a real Master in acupuncture, thats a whole different ballgame.


I am not big aficionado of Chinese medicine or acupuncture initially. I guess you have to go through the whole shebang to appreciate the real life changing effects from a master.


My business partner and very close friend went to him after 15 years of persistent gout problem, he will get his heavy attacks at least…

PUC - An Assessment

PUC has tried to reinvent itself following the untimely passing of its founder last year. His younger brother, who was highly successful in his own right, was running Pictureworks in a number of countries in Asia.

The Shares Price Rise & Possible Catalysts

Share price has broken its all time high comfortably. The rise has been steady and not at all volatile, accompanied by steady volume, which would indicate longer term investors and some funds already accumulating nd not selling back to the market.


Potential Catalyst #1

The just launched Presto app. Tried it and went to the briefing. Its a game changer for PUC for sure. They have already indicated that the e-wallet will be launched only in 1Q2018. Now what is Presto, why Presto. Its very much like Lazada or eBay or Alibaba. Lazada is a platform for retailers to sell, full stop. eBay is more for the personal one man operations. Alibaba is more for wholesalers and distributors.

Presto links retailers/f&b/services originators with en…

How Long Will The Bull Lasts For Malaysia

Are we in a bull run? Of course we are. Not to labour the point but I highlighted the start of the bull run back in January this year... and got a lot of naysayers but never mind:






























p/s: needless to say, this is Jing Tian ... beautiful face and a certain kind of freshness in her looks and acting career thus far



http://malaysiafinance.blogspot.my/2016/12/bank-negara-may-have-switched-on-bull.html


I would like to extend my prediction that the bull run for Bursa stocks should continue to run well till the end of the year. What we are seeing for the past 3 weeks was a general lull where volume suddenly shrunk but the general trend is still intact. My reasons for saying so:

a) the overall equity markets globally will be supported by a benign recovery complemented by a timid approach to raising rates by most central banks

b) thanks to a drastic bear run for most commodities, and to a lesser extent some oil & gas players, the undertone for "cost of materials" have been weak and has pr…