Declines in Japan’s government bonds may lead the nation’s banks to sell even more longer-maturity domestic bonds, raising the risk that global debt markets will also be affected. That is the opinion – reported by Bloomberg – of JPMorgan strategists, who reported that banks are likely to feel pressure to get rid of such issues in order to comply with the limits that were proposed against possible losses in their portfolios to extent. that increase debt yields in the country. Thus, the strategists identify four possible scenarios through which this sale “could be transmitted to central government bond markets outside Japan.”
The first would arise if the bond sale leads Japanese insurers to shed more of their foreign debt holdings; and the second, if the Government Pension Investment Fund – the world’s largest state pension fund known as GPIF – sells some of its currency-hedged foreign debt.
The third scenario they fear lies in a fall in the value of Japanese Government bonds compared to foreign debt, leading pension providers, such as the GPIF, to rebalance their portfolios by selling foreign securities to return to their objective. The fourth and final scenario they envision would occur if Japan’s long-term yields rise enough to attract foreign investors, according to the report.
Concern among investors that a Japanese bond sale will hit global debt markets was triggered by signs that the Bank of Japan could end the world’s latest negative interest rates. The governor of the BOJ, Kazuo Ueda, in statements to the Yomiuri newspaper, assured that such a measure is one of the options available depending on the state of the economy.
A change in BOJ policy would likely trigger a series of macroeconomic operations, from the strengthening of the yen to the return of Japanese funds from abroad. A policy change will tighten global liquidity, as Japanese investors had invested trillions of dollars elsewhere in the world in recent years to escape negative yields.
According to the latest data from the Japan Securities Dealers Association, Japanese banks have sold 1.9 trillion yen ($12.9 billion) in government bonds with maturities of more than 10 years so far this year. That’s a record amount for the January-July period, based on data going back to 2005.
Concerns that rate hikes at home would lead Japanese investors to sell foreign bonds have so far not been realized. The latest weekly flow data from the Ministry of Finance, released on Thursday, showed that domestic investors bought the most foreign bonds in more than three years last week, with net purchases of 3.63 trillion yen.
The fact that the 10-year US Treasury yield is above 4% as the Federal Reserve appears to be in the final stage of its tightening cycle, which should limit declines in bond prices bonds, “can make foreign securities attractive to invest in,” said Tsuyoshi Ueno, senior economist at the NLI Research Institute in Tokyo. “Investors who reduced their holdings of foreign bonds last fiscal year have plenty of room to buy them back and likely did so as we approach the end of the first fiscal half that ends at the end of the month,” he added.
30-year yield at nine-year high
Japan’s 30-year yield hit a nine-year high of 1.725% earlier this week as traders bet that a change in BOJ policy will come sooner than expected. Meanwhile, the benchmark 10-year yield surpassed 0.7% for the first time since 2014.
Major banks appear to have largely concluded their efforts to reduce risks related to foreign currency interest rates, while there appears to have been “comparatively less deleveraging of yen-denominated interest rate risk, which is more concentrated in banks.” regional and Shinkin”, according to JPMorgan. Those lenders may choose to reduce interest rate risks in yen, they estimate.
