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Japanese investors pile into US bonds in July, biggest buying in 3 years

[TOKYO] Japanese investors flocked to US bonds in July, with their net buying hitting the biggest level in three years, as European bonds have lost attraction due to their negative yields.

Data from the Ministry of Finance on Monday showed Japanese investors bought 2.57 trillion yen (S$34.2 billion) of US bonds in July, their largest net buying since July 2016, when they bought a record 4.93 trillion yen.

Japanese investors are one of the biggest investors in global bond markets, as low domestic interest rates have caused them to seek decent returns abroad.

For the first seven month of 2019, they have bought 15.5 trillion yen of foreign currency bonds, with 7.4 trillion yen in dollars and 6.7 trillion yen in euros, according to the MOF data.

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Investors are buying safe-haven bonds as the US-China trade war has threatened the global economic growth, sparking concern about a recession in the United States.

Although the US economy is generally seen as more resilient than many others, providing less incentive to buy bonds, its relative yield advantage is attracting global investors, including Japanese.

That's because US dollar bonds carry the highest yield among the developed world and thus are seen as having potential for bigger falls in yields, and hence larger gains in bond prices than those elsewhere.

Sluggish euro zone growth and expectations of monetary easing by the European Central Bank have already pushed yields on core euro zone countries' debt deep into negative levels.

In July, Japanese investors were net sellers of 23 billion yen of lower-yielding German bonds. They offloaded 227 billion yen of Dutch bonds, the biggest amount since early 2015, the data showed.

FALLING YIELDS

The 10-year German bond yields fell to a record low in July and kept sinking to as low as minus 0.74 per cent in early September.

The Dutch 10-year yields also dropped to around minus 0.60 per cent last month. Earlier this year, both countries offered positive yields.

"The current level of German bonds is too low for us to invest," said Hiroshi Nakamura, senior manager of investment planning at Taiju Life Insurance.

"We are not re-investing in German bonds when they come to maturity," he said.

Investment in bonds of higher-yielding euro zone countries continued in July.

Japanese investors bought 514 billion yen of French bonds, 24 billion yen of Italian debt and 34 billion yen of Spanish bonds in July.

But the plunges in these countries' bond yields in August suggest the Japanese appetite for European bonds is likely to have waned further last month, market players said.

REUTERS