Nerves Over China-U.S. Deal Send Funds Back to Japan’s Swaps
Nerves Over China-U.S. Deal Send Funds Back to Japan’s Swaps
(Bloomberg) -- For a clue on how nervous global funds are getting over a breakdown in U.S.-China trade talks, take a look at their return to Japanese swap markets.
The spread between 30-year yen swap rates quoted on London LCH Clearnet, dominated by non-Japanese funds, and Japan Securities Clearing Corp. has tightened in six of the past seven trading sessions, indicating that global funds are returning to bet on lower long-term rates.
Since touching a five-month high on Nov. 12, Japan’s 30-year swap rate has fallen 12 basis points amid reports that the U.S. and China can’t agree on the amount of tariffs to be rolled back for a deal. Investors can express long positions in yen swaps as a substitute for buying similar-dated bonds.
It wasn’t that long ago when quantitative hedge funds were dumping their holdings of Japanese bond futures as markets began to price in a phase-one trade deal between the U.S. and China.
Foreign funds were also unwinding their long positions in swaps, which had driven a 17-basis point gain in Japan’s 30-year swap rate earlier this month.
Haven trades though have returned. Treasuries have led a global rally in the past two weeks, while Japan’s 10-year bond yields are also set for a second weekly decline.
To contact the reporter on this story: Stephen Spratt in Hong Kong at sspratt3@bloomberg.net
To contact the editors responsible for this story: Tan Hwee Ann at hatan@bloomberg.net, Cormac Mullen
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