Japanese investors dump Eurozone bonds at fastest pace in a decade

Stay informed with free updates

Simply sign up Sovereign bonds Myft Digest – delivered straight to your inbox.

Japanese investors sold euro zone government debt at the fastest pace in more than a decade, with analysts warning that a move by a holder of a Zinard Housing bond could trigger a sharp market sell-off.

Net sales by Japanese investors rose to 41 billion euros in the six months through November – the latest figures to be released – according to data from Japan’s Ministry of Finance and the Bank of Japan, compiled by Goldman Sachs.

Analysts say the prospect of higher bond yields at home and political turmoil in Europe – including the collapse of Germany’s ruling coalition leading up to elections next month, and unrest in France operating under an emergency budget law – may accelerate sales. . French bonds were the most sold during the period at €26 billion.

The sales add further pressure on leveraged European governments already facing a jump in borrowing costs, and highlight how higher Japanese interest rates after years in negative territory are reshaping financial markets around the world.

Alain Bokobza, head of global asset allocation at Société Générale, said Japanese investors returning home is a “game changer for Japan and global markets.”

Although Japanese investors have been net sellers in euro zone bonds for most of the past few years, the pace has picked up in recent months.

Japanese investment flows have been “a stable source of [European] Government bonds are in demand for a long time, said Thomas Willadek, an economist at asset manager T. Rowe Price. But markets are now “entering an era of bond vigilance” where “rapid and violent sell-offs” can often occur.

Gareth Hill, bond fund manager at Royal London Asset Management, said the scenario had “long been a concern for holders of European government bonds, given their historically high holdings.” [among] Japanese investors “and can put pressure on the market.

In addition, the rising costs of hedging against fluctuations in the value of the yen made external debt increasingly unattractive. Although down from the 2022 peak, when hedging costs are factored in, the yield of 10-year Italian government bonds to Japanese investors is just over 1 percent, which is about the same as the Japanese 10-year yield, according to Noriatsu Tanji, chief bond strategist at Mizuho Securities in Tokyo. He pointed to Japan’s regional banks as among the main sellers of European debt.

“Japanese investors should seriously ask themselves to what extent they should hold foreign bonds,” said Andres Sanchez Balcazar, head of global bonds at Pictet, Europe’s largest asset manager.

Norinchukin – one of Japan’s largest institutional investors – said last year that it planned to offload more than 10 trillion in foreign bonds this fiscal year. In November, it posted a loss of about $3 billion in the second quarter after realizing losses on its large holdings of foreign government bonds.

Analysts said the pullback by Japanese investors was putting upward pressure on bond yields that had already surged higher since the European Central Bank began reducing its balance sheet following a popular emergency purchasing program during the coronavirus pandemic.

France – which has one of the deepest bond markets in Europe and has historically been a favorite with Japanese investors because of the extra yield it offers on benchmark German debt – has seen significant Japanese bond inflows in recent months.

Between June and November, as a political crisis deepened that resulted in the fall of Michel Barnier’s government, outflows into Japanese funds totaled €26 billion, compared with turnover of just €4 billion in the same period the previous year.

“There is no doubt that the buyer base has changed for France,” said Seamus MacGurran, head of global rates at JPMorgan Asset Management.

Over the past 20 years, Japanese investors have become corner investors in many bond markets, as ultra-low yields at home have made foreign investments more attractive, including for large investors such as pension funds who need to buy safe sovereign debt.

Total holdings of foreign bonds by Japanese institutional investors reached $3 trillion at their peak in late 2020, according to IMF material.

However, as Japanese investors began to look for returns at home, net buying of global debt securities has shrunk to just $15 billion over the past five years — a far cry from the $500 billion in such purchases they had made in the previous five years, according to According to the accounts of Alex Itra, a macro strategist at Exante.

“While Japanese bonds were very unattractive to domestic investors in the past, they are much more attractive now,” JPMorgan’s Juran said. “This is a structural change.”