Investors fear Japanese bond bets risk becoming new ‘widow-maker trade’

{"text":[[{"start":11.2,"text":"Big international investors are starting to buy beaten-down Japanese government bonds, but many are reluctant to take large positions for fear the bet could yet become the modern version of the infamous “widow-maker” trade."}],[{"start":24.45,"text":"A long-running sell-off in Japanese government bonds, owing to rising interest rates, huge fiscal stimulus and fears of inflation, has sent 10-year bond yields surging above 2.5 per cent for the first time this century. The 1.6 percentage point jump since the beginning of last year makes Japan the world’s worst-performing major bond market over that period. Yields rise as prices fall. "}],[{"start":49.7,"text":"Those higher yields are now luring some investors, but many asset managers remain wary, given the near-relentless nature of the sell-off in recent years and the risks posed by high energy prices and the government’s spending plans. "}],[{"start":64.3,"text":"“We have been dipping our toes into long-end JGBs, [but] quite small clips,” said Ranjiv Mann, senior portfolio manager at fund firm Allianz Global Investors."}],[{"start":76.25,"text":"It has recently bought some small amounts of 20-year JGBs, but Mann said he would be looking for further evidence — such as a more hawkish signal from the Bank of Japan — before making a bigger bet."}],[{"start":87.85,"text":"JGBs have long proved a tricky trade for foreign investors. Repeated attempts by hedge funds and other traders to short the bonds — bet on higher yields — were confounded by the country’s era of negative interest rates and the BoJ aiming to keep 10-year yields around zero per cent for years, earning the trade notoriety for handing investors huge losses. "}],[{"start":109.75,"text":"Now, some managers worry that precisely the opposite trade could become similarly perilous. If markets judge that Prime Minister Sanae Takaichi’s $2tn long-term spending plan will fuel inflation — and that the BoJ is slow to respond by raising interest rates — then investors who have piled into JGBs could be overwhelmed by a fresh wave of selling. "}],[{"start":132.95,"text":"“I think because Japan has been the widow-maker trade for three decades, no one wants to be first in the pool,” said April LaRusse, head of fixed-income specialists at Insight Investment."}],[{"start":null,"text":"

"}],[{"start":143.79999999999998,"text":"JGBs have rallied over the past couple of weeks after the country’s finance minister called on domestic pension funds and the public to invest more at home. But investors are wary about whether this repatriation of capital will actually happen, with many watching to see if Japan’s $1.8tn Government Pension Investment Fund, one of the world’s largest pools of retirement savings, invests more into Japanese assets. "}],[{"start":169.85,"text":"LaRusse said Insight was mulling buying JGBs but was waiting for a clear signal that domestic investors were repatriating capital."}],[{"start":177.6,"text":"“When the GPIF moves, you move,” said Jordan Rochester, a fixed-income strategist at Japanese bank Mizuho. “To ignore it would be a fatal flaw in your investment approach.” "}],[{"start":188.95,"text":"While a change to the GPIF’s long-term asset allocation is unlikely before a scheduled review in 2030, some analysts point out that within its day-to-day wriggle room there is potential for it to buy a significant portion of domestic assets — a move that other investors could follow."}],[{"start":205.54999999999998,"text":"Abbas Keshvani, Asia macro strategist at RBC Capital Markets, calculates that if the GPIF raises its domestic bonds allocation to the maximum level of 31 per cent, it would bring an additional ¥12tn ($75bn) in inflows to the market, before accounting for the impact of “smaller asset managers taking their cues” from the fund. "}],[{"start":230.89999999999998,"text":"But Terrence Pang, a portfolio manager at Fidelity, said the GPIF, “historically speaking, has been quite an independent organisation”. The fund’s investment principles explicitly state it will “never use reserve assets to influence equity markets or to implement economic policies”."}],[{"start":249.64999999999998,"text":"Others see signs of renewed demand in recent debt auctions. Masayuki Nakajima, senior strategist at Mizuho Bank, said two auctions earlier this month, of 30-year and 20-year debt, were “sufficiently strong that many market participants interpreted them as evidence of growing interest from large real-money investors, including overseas accounts”."}],[{"start":271.4,"text":"Kevin Thozet, a member of the investment committee at Carmignac, said it has been buying long-dated JGBs in recent weeks, “but not a big position”, because volatile oil prices and domestic policies such as planned tax cuts made for an uncertain fiscal outlook."}],[{"start":286.15,"text":"He added that he would want to see the “Japanese government showing more restraint on spending” before taking a bigger bet."}],[{"start":293.54999999999995,"text":"Other big international managers are sticking with smaller-than-benchmark weightings in JGBs, in the belief that questions over the government’s fiscal policy and the independence of the BoJ’s policy setting from government influence will keep yields high. Some worry about the impact of higher borrowing costs on the country’s massive debt stock, which stands at about 200 per cent of GDP. The BoJ continues to buy bonds but at a slower pace than previously."}],[{"start":320.69999999999993,"text":"Bill Campbell, a global bond portfolio manager at DoubleLine, said he was “not willing to step in front of” the sell-off in Japanese government bonds by buying. "}],[{"start":330.54999999999995,"text":"“Until there is more of a fundamental change to seriously address the long-term debt-to-GDP and fiscal concerns, it is going to be difficult to step in,” he added."}],[{"start":349.4,"text":""}]],"url":"https://audio.ftcn.net.cn/album/a_1784701632_8433.mp3"}