January 13, 2018 8:13 am JST

Lure of foreign bonds fades for Japanese investors

Net buying tumbles 94% as jump in US Treasury yield spurs caution

TOKYO -- Japanese investors became less enthusiastic about buying foreign bonds last year on growing concern about rising U.S. Treasury yields.

Japanese investors' net purchases of mid- to long-term foreign bonds nosedived 94.6% on the year to 1.1 trillion yen ($9.9 billion) in 2017, the Finance Ministry said Friday, marking the first annual decline in four years.

Institutional investors such as banks and life insurance companies had actively pursued foreign bonds in search of higher returns, finding few alternatives in Japan, where interest rates remained extremely low.

But the November 2016 election of Donald Trump as U.S. president sent the 10-year Treasury yield shooting up from around 1.8% to almost 2.6% in just over a month, and the yield stayed above 2% throughout 2017. Any investors holding onto Treasurys during the yield surge would have incurred significant losses as prices tumbled.

Life insurers' net purchases declined 8.4 trillion yen last year, and banks collectively turned into net sellers, with their net sales reaching a record 7.6 trillion yen. Over 2015 and 2016, in contrast, they bought 20.6 trillion yen more than they sold.

In March 2017, Japan's Financial Services Agency announced stricter oversight on foreign bond investment by regional banks. The following month, net sales of mid- to long-term bonds by Japanese investors hit a monthly record of 4.2 trillion yen.

The higher cost of buying the U.S. dollar is also at play. Life insurers often hedge against a strengthening yen via foreign exchange swaps when investing in foreign bonds. But hedges have become more expensive due to higher U.S. interest rates and other reasons. So the appeal of investing in U.S. bonds has faded overall. 

(Nikkei)

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