Japanese investors bought more foreign bonds in net terms than at any time for two years last week, boosted by increasing expectations of a cut in the US benchmark interest rate.
As predictions of a cut in the Fed funds rate continued to multiply, investors rushed into US government bonds before prices became even higher, analysts said. Net buying soared to Y1,392bn compared with Y140bn the week before, the finance ministry said on Thursday.
News last Friday of a drop in US employment turned the flow to US bonds into a stampede. These were particularly attractive because prices of Japanese government bonds are unlikely to rise further because yields are already so low.
Akihiko Yokoyama, government bond strategist at JPMorgan, said: “Probably US interest rates should be much lower than current levels. [But] can you really believe Japanese yields can fall?”
The yield on 10-year Treasuries had fallen from 4.53 per cent at the beginning of the month to 4.39 per cent on Wednesday, reflecting gathering expectationsof rate falls.
But the yield on the Japanese 10-year fell only from 1.59 per cent to 1.535 per cent. Although expectations of an imminent rate rise by the Bank of Japan have almost disappeared, analysts know the central bank would bitterly oppose any suggestion of a rate cut.
Even if US bond yields fall quite heavily, the rate differential with Japanese bonds will remain huge. High yield differentials between JGBs and other countries’ bonds have been key to retail investors’ interest in foreign bonds, which has accounted for much of Japan’s foreign bond investment in recent years.
The figures run from Monday to Saturday last week.