* Japanese demand for European SSAs wanes
* Investors still wary of potential political upsets
By Matt Painvin and Takahiro Okamoto
LONDON/TOKYO, March 24 (IFR) - Asian investors are scaling
back their exposure to European sovereign and agency bonds ahead
of a contentious French presidential election.
Japanese investors, who were big net buyers of French
sovereign bonds for most of 2016, have been reducing their
positions since November, contributing to a dip in Asian
allocations on recent SSA offerings.
"Asia accounted for 6% of our 10-year deal this week, which
is low by historical standard," said Jun Dumolard, funding
manager at Unedic, referring to Tuesday's €1bn March 2027
offering from the French unemployment benefits agency.
"The political risk is still weighing on participation from
Asian investors, resulting in a downtrend in overseas demand
since last year."
France's presidential election is set for April 23 with a
second round run-off two weeks later, and expectations of a
strong showing for far-right candidate Marine Le Pen have raised
fears for the stability of the eurozone.
Polls predict that Le Pen will eventually lose to centrist
Emmanuel Macron, by around 65% to 35%, on May 7.
"The consensus is that Le Pen will lose in the second round,
but we have all experienced that a consensus does not always
prove to be right," said a global strategy investment head at a
Japanese asset management firm. "That is why Japanese investors
unloaded French bonds."
Japanese investors logged net purchases of French sovereign
bonds for nine of the first 10 months of 2016, according to
preliminary monthly data from Japan's Ministry of Finance.
But they turned net sellers in November, the month of Donald
Trump's surprise US election victory, also selling Italian and
US Treasuries and adding German bonds. Japanese investors
continued to reduce their holdings of French sovereign bonds in
December and January, the data showed.
"A first wave of selling came when the market became risk-on
after Trump's victory, and another wave came in December when Le
Pen's approval rating moved higher," said a Tokyo fund manager.
According to the European Central Bank's latest economic
bulletin, released this week, non-euro area investors were net
sellers of euro area debt securities in 2016 for the first time
since the inception of the currency.
The reduced demand from Asian investors has been evident on
recent European SSA issues beyond France. Asia accounted for
just 2% of the European Stability Mechanism's €3bn 10-year in
early March, against 26% for the European Investment Bank
benchmark in the same tenor launched in January.
"Asian demand has shrunk since the beginning of the year
even though absolute yields are higher," said a banker.
However, the political backdrop is not the only factor
behind the decrease in demand, as some European issuers have
been able to attract Asian buyers to relatively higher yields.
"Asian investors have been driven away from euros by QE-led
negative rates in 2016," said Petra Wehlert, KfW's head of
capital markets. "They are coming back this year as yields pick
up as we saw in our last seven and 10-year bonds with positive
The overall market for European SSAs has remained supportive
since the beginning of the year despite the reduced Asian bid
and sentiment has recently improved, as reflected by the reduced
spread between French and German government bonds.
The French 10-year OAT has tightened by 15bp against Bunds
since February 21, partly reversing a 46bp widening that started
in November 2016.
"Asian demand is more volatile but European investors are
present," said Siegfried Ruhl, the ESM's head of funding.
The Dutch election result on March 15 has eased political
tensions in Europe, after the party of far-right candidate Geert
Wilders won a far smaller share of the vote than expected.
"The sentiment is better among European investors and we
have also had some positive comments from Asian investors since
the last couple of weeks, but it still needs to be reflected in
participation," said Unedic's Dumolard.
European SSAs have largely front-loaded their issuance
programmes for 2017, so Asian investors might find supply
relatively thin when a more stable political environment brings
European credits back onto their radar.
The Japanese strategy head expected some Japanese investors
would return to French bonds if the election produced no
surprises, but said he was reluctant to add exposure until then.
"As the consensus view does not always materialise, we
cannot jump the gun before the election results come out."
(Reporting by Matt Painvin in LONDON and Takahiro Okamoto in
TOKYO; Editing by Steve Garton and Vincent Baby)