FXStreet (Delhi) – Derek Halpenny, European Head of GMR at MUFG, notes that the week to 6th November was another week of strong buying of foreign bonds by Japanese investors.
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“We already know from the balance of payments data this week that the delay in Fed tightening by the FOMC in September that fuelled a strong rally in UST bonds also fuelled demand from Japan with Japanese investors buying JPY 2,820bn worth of UST bonds, the largest total since July 2010.”
“Separate monthly data indicates that demand for foreign bonds continued in October (although we don’t have the country breakdown yet) and today’s weekly data indicates the demand remained in the first week of November. Japanese investors bought JPY 1,035bn worth, the largest since the first week of October.”
“However, what will be more interesting to see is how that demand fared this week in data to be released next week. The surge in expectations of a Fed rate increase in December means forward points have moved to make it more expensive to hedge currency exposure for Japanese investors who have to sell US dollars forward to protect against currency risk while the cost of funding in US dollars through the currency swaps market has become a lot more expensive this week due to a sharp move in the basis market for swapping yen to dollars.”
“We’ve got the low yield story in Japan for sure but it is questionable whether the risk appetite exists. Furthermore, while the cost of hedging is rising, compared to pre-crisis US-Japan spreads, the hedging costs are still relatively cheap in comparison. So we’d be wary of jumping to a conclusion that rising yields in the US will result in greater un-hedged outflows from Japan and a higher USD/JPY rate.”
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