Treasury Yields at 1% Fail to Excite Japanese Bond Investors

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Japanese money managers are biding their time on Treasuries, waiting for the 10-year yield to advance further after it breached the key 1% threshold this week.

“Japanese investors will likely be prompted to buy more Treasuries when the yield rises to 1.3%,” according to Masahiko Loo, fixed-income portfolio manager at AllianceBernstein Japan. “Funds may be tip-toeing back after 10-year U.S. yields rose above 1%, but they expect more fiscal measures” to push yields higher.

Treasury Yields at 1% Fail to Excite Japanese Bond Investors

While Japan is the largest foreign holder of U.S. sovereign bonds, its funds were selling Treasuries and buying higher-yielding debt in Australia and China last year. Debate over how far Treasury yields could climb is also dividing Wall Street, with some expecting it to edge up by just a few basis points while others call for an aggressive advance to 2%.

The 10-year Treasury yield may reach 1.3% by mid-year, says Kenta Inoue, senior market economist at Mitsubishi UFJ Morgan Stanley Securities in Tokyo. A potential rise in inflation may accompany optimism over vaccine availability and market talk of likely Fed tapering, he said.

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“The relative appeal of U.S. bonds won’t immediately rise just because the 10-year U.S. yield hits 1%,” said Eiichiro Miura, general manager of the fixed-income department at Nissay Asset Management Corp. “When its level changes to 1.2% and moves toward 1.5%, it will make it easier for Japanese funds to turn to hedged foreign debt.”

After deducting the cost of currency hedging, a 10-year Treasury bond will offer a yield of about 0.68% for a Japanese investor. That compares with nearly 1% for a similar Australian bond.

Australian bonds remain attractive for Japanese funds, according to both Nissay Asset and AllianceBernstein. “Buying may accelerate if returns after hedging exceed 1%,” AllianceBernstein’s Loo said.

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