A staggering turnaround took place in the first quarter
Japan’s bond investors are making their return to overseas markets after a long gap, but their fresh buying is hedged, short-term and not the dominant force on interest rates and currencies it used to be.
The data however also showed only Japanese banks have resumed buying foreign bonds, not the insurance firms and pension funds with staying power, and this buying was concentrated at the short end of U.S., European and other bond markets. While Japan remains the world’s largest creditor nation, its portfolio investments overseas are traditionally hedged for currency risk, given the yen’s wild swings.
Analysts said that explains why banks, which have access to Fed repurchase agreements at around 4.5%, are the main buyers of Treasuries. Japanese banks bought 7.04 trillion yen worth of foreign bonds in the first quarter, while Japanese insurers sold 1.2 trillion yen worth of foreign bonds. That, analysts said, may curtail the Japanese overseas bid. Investors are not selling yen to buy foreign bonds either, implying negligible impact on the yen.
“Eventually they need coupon income so they need to buy foreign bonds at some point. It’s difficult for them because of the FX hedge, so they may need to buy without FX hedge, maybe when dollar-yen is below 130.”
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