Japanese Snap Up German, French Bonds While Shunning U.S. Debt

(Bloomberg) -- Japanese investors snapped up the most German and French sovereign debt in six months in January, while extending their selling spree in U.S. bonds into a fourth month.

Investors from the Asian nation bought a net 922.4 billion yen ($8.7 billion) of German notes in the first month of the year, the most since July, according to balance of payments data released by the Ministry of Finance Thursday. They purchased 1 trillion yen of French securities, while offloading 920.8 billion yen of American bonds.

The data marks the continuation of a trend that has seen Japanese funds boosting holdings of European debt in recent months as expectations of faster tightening by the Federal Reserve, a rapid rise in yields on Treasuries and higher dollar-hedging costs dim the appeal of U.S. bonds. A booming European economy has also seen investors look past some of the political risks to invest in the region.

“A mild rise in bond yields and brighter prospects for the euro may have attracted demand for European bonds," said Tsuyoshi Ueno, a senior economist at NLI Research Institute in Tokyo. “Speculation that China may pare U.S. Treasury purchases could also have made Japanese investors nervous about taking positions there.”

Japanese funds also bought 61.5 billion yen in U.K. debt in January after taking in 123.5 billion yen of the securities the previous month.

Separate figures issued by the finance ministry Thursday showed that purchases of foreign bonds by Japanese banks’ trust accounts, which are often seen as a proxy for the nation’s pension funds, reached a record in February.

The accounts bought a net 841.7 billion yen of overseas debt last month, when global equity markets tumbled as a continuous increase in yields on U.S. Treasuries fueled panic among investors and sparked a jump in volatility. The dollar weakened 2.3 percent against the yen in February, following January’s 3.1 percent slide that was the biggest in a year.

"Trust accounts may have shifted out from domestic and foreign equities and allocated those proceeds to foreign bonds," said Tetsuya Matsunaga, a senior market analyst at Mizuho Securities Co in Tokyo. “Unlike life insurers, many accounts in trust banks invest in foreign assets on an unhedged basis.”

The balance of payments data from the ministry includes securities issued by governments, government agencies and local authorities, and those with the original maturities of more than one year.

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