Japan's Government Bond Yields Push Investors Home, Treasury Demand Fades
Japan's government bond market is pulling money home as 10- and 30-year yields rise to their highest levels since the 1990s. That shift is making U.S. Treasuries less attractive to Japanese investors, who collectively own about $1 trillion in the debt and now have a stronger domestic alternative.
BlueBay Sees Money Staying Home
Mark Dowding, chief investment officer at BlueBay, said the new cash is not headed abroad. "The new money that's being put to work won't be put to work overseas," he said to the Financial Times.
"It won’t be going into U.S. corporate bonds. It won’t be going into U.S. Treasuries. It will be going into those domestic allocations." His view fits a market that has shifted sharply as the Bank of Japan has been hiking rates while hotter inflation has lifted Japanese government bond yields.
March brought the largest monthly inflow ever into Japanese sovereign bond funds, a sign that domestic paper is reclaiming demand. For a global buyer base that had spent years chasing returns overseas, that is a meaningful turn back toward yen assets.
BoJ Rate Move Near 1%
0.75% is the current benchmark investors expect the Bank of Japan to lift next month toward 1%, and that prospect is adding pressure for capital to stay local. Yields for 10- and 30-year Japanese government bonds have risen to the highest levels since the 1990s, which changes the math for institutions deciding where to park fixed income cash.
Matt Smith, fund manager at Ruffer, said the demand shift is building. "Pressure is building — long-end domestic yields are rising," he said. "And the institutional framework is now ‘please can you bring this money home’. We think yen strength will happen slowly, then quickly."
That leaves Japanese investors with a cleaner domestic choice just as foreign central banks have retreated from the U.S. bond market in recent years. If the home market keeps offering better returns, the flow that once supported Treasuries can thin further.
U.S. Auctions Show Strain
$25 billion of 30-year bonds sold by the Treasury Department at a 5% yield for the first time since 2007 showed how much compensation buyers now want at the long end. In March, auctions for two-, five- and seven-year Treasury notes all saw weak demand, and during the past week a series of U.S. debt auctions drew muted demand.
That combination leaves the Treasury needing to offer more yield to keep attracting buyers if foreign demand softens again. For investors holding U.S. duration, the pressure is not abstract: weaker Japanese appetite could help keep Treasury borrowing costs elevated even as domestic alternatives in Japan improve.
