French Bonds Back on Menu for Japan Funds as Hedge Costs Dip

(Bloomberg) -- French bonds are offering a yield pick up for Japanese investors again, thanks to the yen’s advance.

Declines in euro-yen hedging costs and Japan’s yields mean that investors from the Asian nation could pick up at least 10 basis points when buying currency-hedged 10-year French bonds instead of 30-year JGBs, a benchmark comparison. As recently as November, they would suffer a loss.

The shift comes as mounting concerns over a global economic slowdown drove a two-month rally in haven assets, including bonds and the yen, potentially spurring Japanese funds to rethink investment strategies outlined only in October. They had sold $5.7 billion of French debt that month, with major life insurers publicly mulling plans to bring money home from overseas markets.

“They can’t buy hedged U.S bonds, while they may be able to gain some yields by purchasing European bonds, such as French debt,” said Shinji Hiramatsu, general manager of fixed income investment division at Sompo Japan Nipponkoa Asset Management Co. in Tokyo.

European bonds may also benefit from the comparison with Treasuries. While a tightening in dollar-yen cross-currency basis since mid-November has also made hedging costs for U.S. bonds less punitive, that has been offset by the drop in yields, according to Bloomberg calculations.

That would suggest that Japanese investors who want exposure to U.S. bonds would do so without hedging, said Hiramatsu. Still, the yen’s surprise surge to a nine-month high of 104.87 against the dollar last week means investors would need to account for the risk of more currency fluctuations, he said.

Japanese investors net sold 6.2 trillion yen ($57 billion) worth of U.S. sovereign bonds, which include securities issued by local authorities and government agencies, in the first 10 months of 2018, according to the latest data.

The table below shows the yield pick-up in percentage points available on yen-hedged bonds as a spread over 30-year benchmark in Japan on both Nov. 30 and currently.

To contact the reporters on this story: Stephen Spratt in Hong Kong at sspratt3@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, Nicholas Reynolds

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