Japan’s sinking bond yields may spur record outflows

Japan’s domestic yields are simply too low, says an analyst. (AFP pic)

TOKYO: Japan’s plummeting bond yields suggest there may be a repeat of something that happened in 2016: record outflows into foreign debt.

The Asian nation’s 30-year yields slid to as low as 0.305% in Tokyo trading Thursday, down from almost 1% in October, while those on 40-year debt dropped to 0.335%. Similar levels in 2016 saw Japanese funds send an all-time high total of 24.7 trillion yen (US$228 billion) into overseas bonds.

“Domestic yields are simply too low,” said Hiroshi Yokotani, managing director and portfolio strategist for fixed income and currencies at State Street Global Advisors in Tokyo.

“Investors’ appetite for European debt is increasing, especially in investment-grade corporate bonds.”

Japanese investors have already purchased a net 11.1 trillion yen of foreign debt this year, already surpassing the 2018 total of 10.3 trillion yen, based on preliminary weekly data from the Ministry of Finance.

The biggest change between 2016 and now is the yields Japanese investors can earn abroad have also fallen.

Buying French 10-year bonds with a currency hedge offers a pick up of about 28 basis points, down from an average of about 50 basis points in 2016, data compiled by Bloomberg show.

For US Treasuries, the surging cost of dollar hedging has seen the yield difference slump to minus 59 basis points from 50 basis points.

That may push Japanese investors further out along the risk spectrum, either in terms of making do without currency hedges or investing more in higher-yielding corporate bonds and less in government securities.