June 1, 2017 / 10:00 AM / 7 months ago

Japan investors return to foreign bonds after 5 months of selling

TOKYO, June 1 (Reuters) - Japanese investors are returning to foreign bonds after five months of near relentless selling, data from Japan’s Ministry of Finance showed on Thursday, a delayed start in allocating new money for the financial year that began in April.

Weekly capital flows data showed Japanese investors bought 732 billion yen ($6.6 billion) of foreign bonds last week, bringing total buying in the past four weeks to 3.696 trillion yen ($33.3 billion).

That suggests net buying in May is likely to hit the highest since last July, when they bought 5.449 trillion yen, and signals a major change from heavy selling from December to April.

“In the new financial year, investment in foreign bonds is recovering. There will be more buying if the 10-year U.S. bond yields edge near 2.5 percent,” said Yoshinori Shigemi, global market strategist at JPMorgan Asset Management.

Last year, Japanese investors piled into foreign bonds, with U.S. Treasuries and French government bonds the most popular because of their liquidity and relatively high yield compared with Japanese and German government bonds.

But those investments turned sour. U.S. bond markets tumbled after Donald Trump’s win in the U.S. presidential election raised expectations of reflationary stimulus steps, benefitting equities, while French bonds faltered early this year on worries over the outcome of the French presidential election.

Selling continued even after the new business year began in April, when investors sold a record 4.256 trillion yen ($37.24 billion) of foreign bonds.

Investors appear to be done with selling for now and are likely to rebuild their foreign bond portfolios, market players said.

But the pace of buying seems slower than in recent years, said Hiroshi Yokotani, senior vice president of fixed income at AllianceBernstein.

“In the past few years, we saw a big amount of buying at the start of the Japanese financial year, but that is absent this year. They have little reason to hurry in buying,” he said.

Worries about further falls in foreign bond yields and possible rises in currency hedge costs prompted Japanese investors to front-load their purchases in recent years.

But both global bond yields and hedging costs are steadier now, giving Japanese investors less reason to buy in haste, he added.

Their foray into corporate bonds may slow after massive buying last year, some market players said.

U.S. Treasury Department data published in late April showed Japanese investors’ holdings of U.S. corporate bonds jumped to a record $187 billion in 2016, after having held steady around $165 billion in the preceding three years.

“It’s not that everyone is bullish on credit products. Some investors who had been buying corporate bonds last year are taking a wait-and-see stance,” said Tetsuaki Kobata, managing director of Citigroup Global Markets.

“But the number of investors who buy credit products is clearly increasing at the same time,” he said.

$1 = 110.93 yen Editing by Jacqueline Wong

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