(Bloomberg) — Japan’s negative-yielding bonds were a surprise beneficiary of the collapse in global rates in July.
Foreign investors more than doubled purchases of the nation’s debt last month to 2.88 trillion yen ($27.1 billion) from 1.28 trillion yen in June, according to data from Japan Securities Dealers Association. The bulk of purchases were in the two-to-five-year bracket, where the extra yield that can be gained over Treasuries using currency forwards swelled to the highest in a decade.
Global funds also bought more super-long bonds — those due in 20 years or more — amid speculation the worsening outlook for global growth will spur the Bank of Japan to ease policy, a move that would disproportionately favor longer maturities.
The large purchases of two-to-five-year bonds by overseas investors imply they were relatively active on cross-currency transactions as yields fell in the rest of the world, said Keiko Onogi, senior JGB strategist at Daiwa Securities Co. in Tokyo. The buying of longer-maturity debt suggests they were topping up duration risk given growing concerns about the global slowdown, she said.
While all Japanese bonds with maturities up to 15 years are yielding less than zero, using currency forwards to structure the investment can more than compensate for that.
Investors who lend dollars for yen using three-month forwards can earn an annualized return of 2.49%. Taking the yen proceeds and plugging them into five-year JGBs gives a total return of 2.15%. That’s a 70 basis-point pick-up over five-year Treasuries, the most since 2008.
While foreign funds boosted overall holdings of Japanese bonds last month, local investors were net sellers of the two-to-five-year sector. Major domestic banks offloaded 241.6 billion of those maturities, while trust banks cut holdings by 204 billion yen.
Foreign investors have been net buyers of Japan’s super-long bonds for all but one month this year amid intensifying speculation the central bank will respond to the global-growth slowdown by boosting stimulus. Morgan Stanley (NYSE:), Goldman Sachs Group Inc (NYSE:). and JPMorgan Chase (NYSE:) & Co. have all recommended investors buy the nation’s longer-dated debt in recent weeks.
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