(Bloomberg) – The Treasuries are off to their worst start to a year in more than four decades, but a familiar set of supporters could soon come to their rescue.
Bloomberg’s Most Read
Japanese investors – the largest overseas holder of US bonds – are gaining momentum to increase their buying, with recent auctions showing strong overseas demand and fund managers signaling there is no real alternative. They are seen waiting for the passage of a volatile March before positioning themselves for the start of the new financial year in April – after being notable bond sellers on the acceleration of bets on Federal Reserve rate hikes .
“In the new fiscal year, US Treasuries won’t change to become a big enough investment destination for Japanese investors,” said Satoshi Nagami, head of asset allocation group at Sumitomo Mitsui DS Asset Management. Co. But “until the U.S. monetary policy path becomes firm and clear, it would be difficult to get into buying immediately.
Bond market volatility has accelerated this month, with Treasuries selling when hawkish expectations of rate hikes rise and recovering when geopolitical sentiment deteriorates. Benchmark yields slipped below 1.9% on Tuesday amid mounting tensions in Ukraine.
But recent US auctions have shown a surge in demand from foreign investors, with US 10-year yields trading near 2%. For the Japanese, European debt is still seen as less attractive, even after German bunds broke above zero earlier this year, while the Bank of Japan caps yields at home.
The currency-hedged yield on benchmark 10-year Treasuries was 1.21% on Friday, compared with 0.61% for an equivalent position in German Bunds and 0.94% for Japanese government bonds at 30 years, according to data compiled by Bloomberg. US markets were closed Monday for a public holiday.
A double whammy from soaring inflation and the Fed setting the stage for rate hikes have helped drive Treasuries down about 3% so far this year – its worst start since at least minus 1980. A spike in volatility and the potential for a very big rate hike in March are some of the reasons why Japanese fund managers remained on the sidelines.
Although it is difficult to quantify the effect on Treasuries that an increase in purchases by the Japanese might have, historical periods when they have pulled out of the market have often coincided with peaks in yields.
“Japanese investors are taking a wait-and-see attitude amid the risk of a 50 basis point Fed rate hike in March,” said Naokazu Koshimizu, senior rate strategist at Nomura Securities Co. in Tokyo. “If the Fed raises the rate by 50 basis points in March, inflation slows from April to June and it becomes more likely that the Fed will increase at a slower pace, so I expect Japanese demand of treasury bills materializes.”
Koshimizu spoke on Friday ahead of comments from New York Fed President John Williams opposing a half-point move, leading traders to lower their expectations for March. On Monday, Fed Governor Michelle Bowman suggested a half-percentage-point hike could be on the table if incoming inflation data is too high.
The rise in yields has been global, so there are other avenues for Japanese money. Uncertainty over the pace of rate hikes in the Pacific suggests that some may be considering European bonds.
“Relative carry income is currently higher in the United States than in Europe, but the difference with the United States is that the pace of rate hikes would be slow in Europe,” said Eiichiro Miura, managing director of the department. fixed income securities at Nissay Asset Management Corp. “While life insurers will likely retain some allocations to Treasuries, they could also look to Europe, bearing in mind the risk of accelerating US rate hikes.”
And while yields in Japan have also climbed – the 30-year yield brushed 1% on Thursday, its highest since February 2016 – the BOJ is anchoring it with its yield curve control policy. The central bank intervened in 10-year bonds on Feb. 14 and some traders believe it could also do something in longer-dated securities.
This suggests that demand for Treasuries will continue – Japanese investors bought more of them than bonds in any other market last year, even as they cut their purchases by almost half to 5.5 trillion. yen ($47.7 billion).
“We expect Japanese buying of Treasuries to persist, particularly past the end of the financial year, and as long as the BOJ keeps rates low in Japan,” said Andrew Mulliner, head of treasury. Global Global Strategies at Janus Henderson.
(Updates fourth paragraph, adds details on treasury bill pricing.)
Bloomberg Businessweek’s Most Read
©2022 Bloomberg LP