Treasury Yields at 1% Fail to Excite Japanese Bond Investors

(Bloomberg) -- Japanese fund managers aren’t loading up on Treasuries even after the 10-year yield climbed to 1% this week. They plan to jump in once yields rise further.

“Japanese investors will likely be prompted to buy more Treasuries when the yield rises to 1.3%,” according to Masahiko Loo, fixed-income portfolio manager at AllianceBernstein Japan. “Funds may be tip-toeing back after 10-year U.S. yields rose above 1%, but they expect more fiscal measures” to push yields higher.

With near-zero yields at home, Japanese funds have ramped up debt purchases of higher yielding Australian and Chinese bonds. They resumed buying Treasuries in September after selling in August but their purchases have stayed muted. Japanese interest in U.S. bonds is now seen growing as the Democratic sweep raises the prospect of larger fiscal steps and higher yields.

“The relative appeal of U.S. bonds won’t immediately rise just because the 10-year U.S. yield hits 1%,” said Eiichiro Miura, general manager of the fixed-income department at Nissay Asset Management Corp. “When its level changes to 1.2% and moves toward 1.5%, it will make it easier for Japanese funds to turn to hedged foreign debt.”

Meanwhile, Australian bonds remain attractive for Japanese funds, according to both Nissay Asset and AllianceBernstein. “Buying may accelerate if returns after hedging exceed 1%,” AllianceBernstein’s Loo said. Currently, the 10-year Aussie bonds return nearly 1% after hedging compared with 0.63% for similar Treasuries.

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