Thursday, 28 October, 2021

Japan investors look to switch from European bonds

TOKYO: Japanese investors look set to switch some money from European bonds to US debt, hoping for capital gains after the US bond yield curve recently flashed signs of recession down the road.

While the jury is still out on whether the United States will have a recession, such fears were enough to sink bond yields to zero percent in Germany and Japan, which face possible ones sooner than the world's biggest economy does, report agencies.

That has made the United States. the only major market where investors can expect further falls in bond yields, and hence gains in prices, market players say.

"Concerns about a US recession are rising among investors we communicate with," said Hiroshi Yokotani, portfolio strategist at State Street Global Advisors. "The US could slip into a recession or the Fed may try to stop it by cutting interest rates. Either way, bond yields should fall."

Yokotani sees a shift to US bonds from European ones, as "investors are looking to capital gains as they expect yields to fall".

For years, Japanese investors have sought refuge in foreign bonds, effectively kicked out of their domestic bond market by the Bank of Japan's ownership of nearly half of it. Japanese are among the biggest players in the United States and Europe.

In 2018, European bonds were their favourite as German Bund yields rose to as high as 0.80 per cent and French yields above 1.0 per cent at one point.

On the other hand, US bonds were shunned despite their higher yields, as the cost of currency hedging, closely tied with dollar short-term interest rates, increased as the Federal Reserve kept raising rates.

But the picture has changed as the spectre of a US recession added to growth concerns in Europe and Japan.

Germany narrowly skirted a recession at the end of last year while Japan's economy contracted in two of 2018's quarters and might have shrunk in January-March. Data will be reported in May.

But in contrast to the United States, where rate cuts are possible, neither the BOJ nor the European Central Bank have room to trim, with rates already below zero percent.