* 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 yields.”
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)