Japanese yield hunt adds to $A pressures

Low returns at home likely to push Japanese investors back into Australian assets Photo: Kiyoshi OtaNegative interest rates and stock weakness in Japan could revive demand from that country’s investors for Australian government bonds, which will put more upward pressure on the local dollar.

Fixed-income experts say although a surge last month in Japanese buying of foreign, long-dated securities didn’t appear to extend to Australian government paper, higher relative yield in a world of negative rates remained attractive to Japanese institutional investors.

Broader demand for Australian bonds, credits and other assets is among the reasons for the Aussie’s relative strength at the moment.

Others include signs that economic growth is gaining momentum, and recent rises in the price of key commodities such as oil and iron ore.

The local unit climbed above US75¢ for the first time since last July overnight, peaking at US75.28¢, despite an 8 per cent correction in the iron ore price. The Aussie also moved sharply up against the New Zealand dollar on Thursday after the central bank there announced a surprise 25 basis point cut in interest rates, to 2.25 per cent.

The European Central Bank is also expected to further ease monetary policy when its board meets on Thursday (just after midnight Friday AEST), making Australian interest rates even more attractive to foreign investors.

Japan’s Ministry of Finance said this week life insurance companies bought a net ¥1 trillion ($13.5 billion) worth of foreign long-term securities in February, their biggest monthly acquisition since April 2008.

Analysts ascribed a lot of this to end-of-financial-year “window dressing” by the insurers, as they took profits to boost balance sheets before committing to new securities.

However, poor performance by the Japanese stock market and record low yields on long-dated government bonds is likely to push the country’s massive pool of savings, retirement funds and other institutional capital back into foreign bond and credit markets.

Japanese institutions owned a large slice of Australia’s government bond market until about the middle of last year, but sold down heavily as the Aussie dollar slid against the yen amid speculation about further cash rate cuts by the Reserve Bank of Australia.

Demand from Japan remains weak, but could spark up again at the beginning of the country’s financial year, on April 1, says Charlie Jamieson of government bond specialist Jamieson Coote Bonds.

This would add to the pressures – including a bounce in commodity prices – currently holding the Aussie around eight-month highs.

“There is now a structural buyer underneath the Australian dollar because the Japanese are coming to consume our yield, because it’s high-quality yield,” said Jamieson.

“This is unwelcome at a time when the Reserve Bank of Australia is saying we need the Aussie at US65¢ and technically we’re going very powerfully the other way.”

ANZ Bank’s senior rates strategist, Martin Whetton, agrees Japanese investors will again be forced abroad.

However, he said there were no signs yet they would go back into Australian government bonds; instead they were chasing returns through higher-yielding corporate credits.

“The risk-reward of the skinny [bond] yield versus potential foreign exchange downside is too low,” he said.

He said like any investor, Japanese institutions looked at the “trade-off between yield and liquidity”.

“Australian government bonds offer the highest liquidity in the Australian dollar market, given the size of the market and frequency of issuance,” he said.

“However, to move back to Australian government bonds, yields will need to be higher or credit spreads at a significantly tighter level where the yield/liquidity argument falls in favour of the government securities.”

This story Administrator ready to work first appeared on Nanjing Night Net.

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