Lofty global bond prices partly reflect expectations of a wave of Japanese buying prompted by Bank of Japan (BoJ) suppression of domestic yields. The Japanese, however, may never arrive.
Japanese investors remained net sellers of foreign bonds and notes in the week before last, as they have been in 11 of the last 12 weeks – see first chart.
The suggestion is that they are about to pile into overseas bonds to escape lower domestic yields and a weakening yen. The real trade-weighted yen, however, is near the bottom of its historical range, having fallen by more than 20% over the last 10 months – second chart. Risk-averse Japanese investors are unlikely to judge it a good time to raise their foreign currency exposure.
The yield pick-up for accepting such exposure, moreover, has declined. JGB yields of all maturities are higher now than at end-March, before the 4 April BoJ announcement of expanded QE. The five-year benchmark yield has climbed from 0.13% to 0.24%, delivering a 0.57% capital loss (i.e. four years of yield). With five-year yields falling in the US (and elsewhere), the US / Japanese spread is almost back to the low reached in summer 2012, in turn suggesting that dollar / yen has overshot – third chart.
Global bond markets are at risk from a liquidation of speculative long positions opened in anticipation of the arrival of “greater fool” Japanese buyers.
