As Global Bonds Surged, Japanese Were Buying Like Never Before

(Bloomberg) -- The coronavirus pandemic drove Japan’s biggest weekly purchase of global debt on record by its traditionally cautious funds.

With yields from the U.S. to Germany tumbling at a furious pace, Japanese investors placed orders for 4.24 trillion yen ($41 billion) of debt last week, according to data from the nation’s finance ministry going back to 2005. That’s close to what they bought in the first two months of the year.

The buying is an indication of how just desperate the cash-rich Japanese are to lock in yields, which plunged to record lows all over the world after the Federal Reserve’s emergency rate-cut last week. The flows, dwarfing a previous record of 2.55 trillion yen, were probably also driven by the yen’s surge.

“This weekly purchase is massive,” said Tsuyoshi Ueno, a senior economist at NLI Research Institute in Tokyo, who added that Japan’s Government Pension Investment Fund was probably a buyer. “Along with the move by the public fund, banks may have also bought as the dollar-yen was in a downtrend during the week.”

Preliminary monthly figures showed this week that proxies for Japanese pension funds bought a record amount of overseas debt for a second month in February. With the nation’s benchmark 10-year yield likely to remain negative for the foreseeable future, the pressure to keep buying bonds abroad will continue.

With the yen climbing to a six-month high last week, purchases overseas became cheaper for Japanese institutions. Gains have accelerated this week, propelling the currency to its highest level against the dollar since 2016.

“It’s likely that pension funds bought overseas bonds as the yen strengthened,” said Yujiro Goto, head of foreign-exchange strategy at Nomura Holdings Inc. in Tokyo. “Should the GPIF increase allocations further, expectations of more outflows may help limit a rally in the yen.”

The weekly data also showed global funds acquired a net 1.1 trillion yen of Japanese bonds, the most in a month. Currency-hedged Japanese two-year government notes offered a yield premium of about 50 basis points over similar-maturity Treasury debt to dollar-holding investors, based on data compiled by Bloomberg.

--With assistance from Hiroko Komiya.

To contact the reporters on this story: Masaki Kondo in Tokyo at mkondo3@bloomberg.net;Chikafumi Hodo in Tokyo at chodo@bloomberg.net

To contact the editors responsible for this story: Tan Hwee Ann at hatan@bloomberg.net, Brett Miller, Shikhar Balwani

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