U.S. Credit is Best Value for Japan Funds, State Street Says


(Bloomberg) -- Japanese funds looking to boost returns should focus their attention on U.S. corporate bonds on a currency-hedged basis.

That’s the recommendation of State Street Global Advisors, which says a decline in dollar-hedging costs presents the best opportunity in years for the Asian nation’s investors.

“U.S. investment-grade, high-yield bonds are offering the best yield levels relative to hedge costs in about seven years,” said Hiroshi Yokotani, managing director and portfolio strategist for fixed income and currencies in Tokyo at the $2.69 trillion asset manager.

The Federal Reserve’s unprecedented plan to buy investment grade and some high-yield debt has burnished the appeal of U.S. credit markets. The nation’s corporate investment-grade bond funds saw $6.6 billion of inflows in the week ended May 6, their third-biggest ever, according to data from Refinitiv Lipper.

U.S. Credit is Best Value for Japan Funds, State Street Says

Japanese investors are seeking to diversify their foreign investments in a bid to safeguard returns amid the financial-market turmoil triggered by the coronavirus pandemic. That’s after the relentless easing of monetary policy by global central banks hammered the potential returns from many sovereign bonds in two of their top overseas markets -- the U.S. and Europe.

Dollar-hedging costs slid to a five-year low this month. Yen investors now have to pay just 0.54% to hedge their dollar exposure for three months, down from as high as 3.12% last year.

The average yield spread of U.S. investment-grade corporate bonds over Treasuries has climbed to 213 basis points as of Monday, from 93 at the end of 2019, according to a Bloomberg Barclays index.

That makes for “extremely attractive and cheap levels,” said Yokotani. Potential demand for dollar-based assets among Japanese investors is probably huge because they have scaled back on such investments over the past couple of years due to expensive valuations, he said.

Here are some more of his comments:


Japanese investors are unlikely to be lured to Treasuries until the 30-year U.S. yield rises to around 2%. The steepening of the U.S. curve on fiscal and supply concerns may prompt investors to shun longer maturities and stick to shorter tenors or corporate bonds.

European Bonds

European bonds offer very little appeal, and the German court’s ruling raising questions about some of the European Central Bank’s policies highlights the vulnerability of the fiscal situation in Italy and Spain.

“Japanese investors can secure pretty good yields from U.S. investment-grade corporate bonds, so the probability of them returning to Italian and Spanish debt has likely decreased considerably.”

EM Bonds

Emerging-market bonds were “clearly cheap” even before the coronavirus issue arose, particularly those in the Asian region, Yokotani said. “The best recommendation is China, where yield levels and the steepening shape of yield curve make longer bonds in particular very attractive.”

Bonds in smaller markets like South Korea, Singapore and Taiwan are also attractive as these countries, which are driven by tech cycles, can expect recovery as the industry seems to have bottomed out.

©2020 Bloomberg L.P.

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