Japan funds buy most European bonds since 2020 on higher yields

[TOKYO] Japanese funds bought the largest amount of euro-denominated bonds in more than a year as yields soared amid low currency-hedging costs.

Investors acquired a net 1.15 trillion yen (S$13.6 billion) of the securities in January, showed the latest balance-of-payments report released on Tuesday (Mar 8) in Tokyo. They sold a net 15.4 billion yen of Russian bonds, the most since March 2014, the data showed.

"A rise in absolute European yield levels was the main driver," said Tsuyoshi Ueno, a senior economist at NLI Research Institute in Tokyo. "Hedge costs also remain a positive factor."

Benchmark German yields turned positive in January amid speculation that the European Central Bank (ECB) would start to normalise policy, before the war in Ukraine upended these bets. European bond purchases came in contrast with net selling of bonds from the United States and Australia, where the central banks are expected to start to raise policy rates this year.

The 1.15 trillion yen of euro-denominated bonds purchased was the largest sum in January among the 9 foreign currencies tracked by the BOP data.

Currency-hedged euro bonds have rebounded since bottoming in mid-February amid rising demand for safe assets. Overnight-indexed swaps suggest the ECB will leave its policy rate unchanged at least for much of this year.

"European bonds are good to hold given a smaller risk of a monetary policy shift than in the US," Ueno said. "The European Central Bank is still cautious about tightening." BLOOMBERG