Stay informed with free updates
Just sign up for the Sovereign Debt myFT Digest, delivered straight to your inbox.
Japanese investors are selling euro zone government bonds at the fastest pace in more than a decade, and analysts say a move by one of the region’s key bondholders could lead to a sharp selloff in the market. warns.
Net sales by Japanese investors rose to 41 billion euros in the six months to November, according to data released by Japan’s Ministry of Finance and the Bank of Japan and compiled by Goldman Sachs. latest numbers).
Analysts said the sell-off was fueled by the prospect of rising domestic bond yields and political changes in Europe, including the collapse of Germany’s coalition government leading to a general election next month and turmoil in France, which is operating under emergency budget laws. . . The most sold French bonds during this period were 26 billion euros.
The sale will put further pressure on debt-laden European governments, which are already facing soaring borrowing costs. They highlight how Japan’s rising interest rates, which have been in negative territory for years, are reshaping financial markets around the world.
Alain Bokobza, head of global asset allocation at Société Générale, said the return of Japanese investors “is a game-changer for Japan and the global market.”
Japanese investors have been net sellers of euro zone bonds for most of the past few years, but the pace has accelerated in recent months.
Tomasz Wiladek, an economist at asset management firm T. Rowe Price, said Japan’s investment flows “have been a stable source of demand for (European) government bonds for a long time.” But the market is now “entering a period of bond caution,” with “rapid and violent sell-offs” likely to become more frequent.
Gareth Hill, fixed income fund manager at Royal London Asset Management, said this scenario “has long been a concern for holders of European government bonds, given the historically high level of holdings by (Japanese) investors. “This could put pressure on the market,” he said.
Some content could not be loaded. Please check your internet connection or browser settings.
Furthermore, the attractiveness of foreign bonds is becoming increasingly less attractive due to the soaring cost of hedging against fluctuations in the yen exchange rate. According to Chief Noriatsu Tanji, the Italian 10-year government bond yield for Japanese investors is just over 1% after hedging costs are taken into account, although it has declined from its peak in 2022. It is said to be about the same as the government bond yield. Bond strategist at Mizuho Securities (Tokyo). He pointed out that Japanese regional banks are one of the main sellers of European bonds.
“Japanese investors are probably asking themselves some very tough questions about how much foreign debt they should own,” said Andres Sánchez Balcazar, head of global fixed income at Pictet, Europe’s largest asset manager.
The Norinchukin Bank, one of Japan’s largest institutional investors, announced last year that it plans to withdraw more than 10 trillion yen in foreign debt this fiscal year. In November, it recognized losses on large foreign government bond holdings, posting a loss of about $3 billion in the second quarter.
Analysts say bond yields have risen on a pullback from Japanese investors since the European Central Bank began paring its balance sheet with a massive emergency bond-buying program amid the coronavirus pandemic. Despite the pressure, bond yields are already rising.
France has one of Europe’s deepest bond markets and has historically been popular with Japanese investors because it offers higher yields than benchmark German government bonds, but in recent months France has received a large amount of capital from Japan. funds are flowing out.
Between June and November, when the political crisis deepened following the fall of Michel Barnier’s government, total outflows from Japanese funds reached 26 billion euros, compared with just 4 billion euros in sales in the same period a year earlier.
“There’s no question that the buyer demographic in France has changed,” said Seamus Mac Golan, head of global rates at JPMorgan Asset Management.
Recommended
Over the past two decades, Japanese investors have moved into several bond markets, as ultra-low domestic yields have made overseas investments more attractive, including for large investors such as pension funds who need to buy safe sovereign bonds. It has become the cornerstone of
According to the IMF, total foreign debt holdings by Japanese institutional investors reached $3 trillion at its peak at the end of 2020.
However, as Japanese investors began seeking profits at home, global bond purchases have shrunk to a total of just $15 billion over the past five years, compared to about $500 billion in purchases during the 20th century. Far from it. For the past five years, according to calculations by Alex Etra, macro strategist at Exante.
“Japanese bonds used to be completely unattractive for domestic investors, but now they are more attractive,” said JPMorgan’s Golan. “It’s a structural change.”
