* Negative-yielding JGB offer decent return when swapped to
* Dollarised JGBs yield 30 bps over LIBOR, was above 70 bps
* Sovereign investors among main buyers of dollarised JGBs
* Asian investors buy JGBs at record level in January
By Hideyuki Sano
TOKYO, March 24 Negative interest rates on
Japan's government bonds make them among the world's least
attractive but financial alchemy has allowed investors to turn
this debt into high-yielding dollar bonds that cut exposure to
Federal Reserve policy risks.
While short-term JGBs, whose yields are still below zero
percent, are spurned by domestic investors, a quirk in the
currency swap market makes them attractive to foreign investors.
"There remains fairly strong interest from foreign investors
on JGBs, including banks and sovereign players," said Naoya
Oshikubo, yen rates strategist at Barclays.
Two-year JGBs now yield minus 0.26 percent.
Using a technique called asset swaps, however, they can be
repackaged into two-year floating-rate dollar bonds that yield
about 0.30 percent, or 30 basis points, above the benchmark
London InterBank Offered Rate (LIBOR).
That is a hefty yield enhancement compared with two-year
U.S. Treasuries notes, which would yield about 35 basis points
less -- not more -- than the LIBOR if investors swap their fixed
coupon into floating rates.
Earlier this year, the dollarised JGBs yielded about 70
basis points more than LIBOR.
Yields on dollarised JGBs are elevated because of the
imbalances in the currency basis swap market, where players swap
two currencies for a certain period of time.
For instance, an investor can borrow yen, paying yen
interest rates, in exchange for lending dollars and receiving
interest on them. In other words, a bank effectively borrows one
currency while using the other currency as collateral.
So this swap should theoretically have no additional costs
involved. But in reality because there is far greater demand for
dollar from Japanese investors, dollar borrowers have to pay
extra costs to yen borrowers.
That premium, called dollar/yen currency basis spread, rose
sharply last year, with three-month spread
hitting almost one percent in December.
While the premium has since shrunk to around 31 basis
points, partly because foreign investors' appetite for JGBs has
grown, it still remains large enough to keep dollarised JGBs
According to data from Japan's Ministry of Finance, in
January, the latest month for which data is available, Asian
investors bought 1.379 trillion yen ($12.36 billion) of Japanese
bonds, their largest net buying in almost six years.
Among them, Chinese investors bought 890 billion yen of
Japanese bonds, their biggest since August. A large part of
Asian buying is considered to have come from state-backed
investors - such as sovereign wealth and pension funds - who
tend to park their funds in fixed income rather than bank
The shift to JGBs comes as institutions reduce their U.S.
Treasuries holdings amid the spectre of rising interest rates.
Data from the U.S. Treasury shows foreign official investors
sold $44.9 billion in U.S. Treasuries in January this year after
a record $338.0 billion selling last year.
China bought a small amount of U.S. Treasuries in January
but that came only after seven straight months of net selling,
the longest such spell on record, as Beijing sells U.S. bonds
and dollar to prop up the yuan.
Analysts say while the pace of buying of dollarised JGBs
could slow, they're likely to continue to attract foreign
"It also depends on what other alternatives investors have
in dollar investments," said Makoto Noji, senior strategist at
SMBC Nikko Securities.
"But as long as there are decent yields, JGBs appear to
remain a place to go for them."
($1 = 111.60 yen)
(Reporting by Hideyuki Sano; Editing by Sam Holmes)