(Bloomberg) -- Spare a thought for Japan’s yield-starved investors.
Not even three months into a new fiscal year, a gauge of global bond yields has slumped to the lowest since 2017 and the yen has strengthened against almost all its major peers. Assumptions made when investment plans were released in April are being rapidly reworked.
A shift to longer-maturity bonds, increased appetite for curency risk and greater weighting for overseas corporate credit are all possibilities as expectations the Federal Reserve is poised to cut interest rates pummels the yield available from traditional investments such as Treasuries.
Bloomberg checked in with a number of Japan investors to see how they were dealing with the rapid shift in markets. Here are some of their thoughts:
Nissay Asset Management
The heightened prospect of the Fed cutting rates this year has forced insurers to amend their plans, slowing the pace of their investment flows, says Eiichiro Miura, general manager in Nissay’s fixed income investment department in Tokyo.
- Pace will slow until the market forms a consensus on the likely path of rate cuts
- No choice but to diversify investments. This may include corporate bonds, extending duration in Europe and taking on more currency risk
- Decline in European yields means there is a need to allocate some funds to unhedged positions
Nomura Asset Management
Right now, the uncertain currency outlook is keeping investors sidelined even if they want to invest overseas, Tokyo-based chief strategist Shigeki Sakaki says
- Investors may have to lengthen duration by raising exposure to unhedged 30-year Treasuries to boost returns
- If the U.S. economy is slowing there are credit risks in non-sovereigns. Treasuries are liquid and have no credit risk so in a slowdown it’s easier to see money go into U.S. super-long maturities
- Still, considering the risk of currency fluctuation, investors can’t buy unhedged bonds heavily
- Looking at spreads in short-dated maturities, Spanish and Italian bonds may be attractive
Sompo Japan Nipponkoa Asset Management
Current yield levels and their rapid decline since May makes it hard to invest in Treasuries or other U.S. bonds without currency hedging, says senior investment manager Shinji Hiramatsu.
- Japanese investors may look to offload hedged Treasury positions in the current market
- If the Fed starts to ease and the yield curve bull steepens then demand for hedged U.S. debt will revive
- Investors will have to turn to Europe, to places like France
Asset Management One
Japanese investors have to change their mind set, says global fixed-income fund manager Akira Takei
- For one, they can expand investment targets to emerging countries such as Mexico and South Africa. Even if they can’t go that far, yields in Italy and Spain are quite high
- They can go to longer maturities in countries with steep yield curves instead of fretting and selling on negative headlines
- They also need to be more open to credit risk, not limiting themselves to securities in the U.S., Germany, France or Belgium
- Banks also need to think of total return not just focusing on income but also seek capital gains
- Investors should look at currency to improve returns rather than just as a tool to hedge
CIBC World Markets Japan
Dollar assets are ultimately where Japanese money will go to, says executive director Kazuaki Oh’E
- Euro bonds are good because of hedge costs, but German yields are negative and French yields have come down considerably. Investors may have been buying euro-denominated bonds but eventually they have to rely on dollar assets
- Investors are buying corporate bonds with currency hedges, and if they have more capacity, unhedged Treasuries which they can liquidate any time
- Life insurers’ dollar foreign-currency liabilities are rising so they can match that with unhedged foreign bonds
- Only Treasuries have the most liquidity and the highest yield among developed countries so that’s where Japanese money eventually returns