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Japan buys record 4.24t yen of overseas bonds

Tokyo

Japanese investors went on a record shopping spree in global debt markets last week as the yen streng-thened and their hunt for yield intensified.

Net buying soared to 4.24 trillion yen (S$57.1 billion), surpassing the previous high of 2.55 trillion yen set in July 2016, according preliminary figures from the nation's finance ministry going back to 2005.

The data suggests that far from being scared off by the coronavirus pandemic and fears in the oil market, normally cautious Japanese investors helped drive the debt rally last week. The fund flows for the record purchases were so great that they likely curbed what would have been an even larger gain in the yen.

"This weekly purchase is massive," said Tsuyoshi Ueno, a senior economist at NLI Research Institute in Tokyo, who added that the Government Pension Investment Fund had probably been active. "Along with the move by the public fund, banks may have also bought as the dollar-yen was in a downtrend during the week."

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Preliminary monthly figures showed this week that proxies for Japanese pension funds bought a record amount of overseas debt for a second month in February. With Japan's benchmark 10-year government bond yield likely to remain negative for the foreseeable future, the pressure to keep buying debt abroad will continue, even as rates fall elsewhere.

Fears of virus-induced damage on global growth prompted the Federal Reserve to cut borrowing costs at an emergency meeting last week, quickening a drop in Treasury yields to record lows.

With the yen climbing to a six-month high last week, purchases overseas became cheaper for Japanese institutions. Gains have accelerated this week, propelling the Japanese currency to its highest level against the dollar since 2016.

"It's likely that pension funds bought overseas bonds as the yen strengthened," said Yujiro Goto, head of foreign-exchange strategy at Nomura Holdings. in Tokyo. "Should the GPIF increase allocations further, expectations of more outflows may help limit a rally in the yen."

The weekly data also showed global funds acquired a net 1.1 trillion yen of Japanese bonds, the most in a month. Currency-hedged Japanese two-year government notes offered a yield premium of about 50 basis points over similar-maturity Treasury debt to dollar-holding investors, based on Bloomberg data. BLOOMBERG

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