Record high Japanese yields trigger bets on repatriation

Record high Japanese yields trigger bets on repatriation

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Fund managers say country’s investors will sell out of US Treasuries to invest in JGBs

Investment firms are positioning for a potential repatriation of Japanese investor cash out of US Treasuries and back into Japanese government bonds, as domestic yields surge to record highs.

But the historic ructions in the JGB market are causing some asset managers to place significant bets that Japanese cash abroad will be redomiciled.

The BoJ raised its policy interest rate to a three-decade high of 0.75 per cent in December, signalling an end to its longstanding easy monetary policy. Cash has since begun to trickle back home, with investors betting that the trend will accelerate.

Investors poured roughly $700mn into Japanese sovereign bond funds in March, according to data from fund monitor EPFR, the biggest monthly inflows into the category on record. Inflows in April were $86mn, more in line with recent monthly moves.

“Pressure is building — long-end domestic yields are rising. And the institutional framework is now ‘please can you bring this money home’. We think yen strength will happen slowly, then quickly,” said Matt Smith, a fund manager at Ruffer.
“We’re long yen. It is one of our key hedges. In a moment of market turmoil, especially if the turmoil is US-credit-market-centric, you will see the yen strengthen as Japanese investors bring capital home,” said Smith.

Abbas Keshvani, Asia macro strategist at RBC Capital Markets, said Japanese investors had been net buyers of $50bn worth of foreign bonds over the past 12 months, despite higher JGB yields “offering ostensibly better compensation to investors”.
The issue, said Keshvani, is that Takaichi has made it clear that she favours more fiscal spending, so even though the BoJ is pulling back as a buyer of JGBs, the amount of new issuance will probably not fall significantly.