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Japanese investors are flooding yen into US dollar assets
THE world champions of negative-rate investing are piling into long-term US dollar swaps, an indication that they see nothing to tempt them in the Japanese market for a very long time.
Yen-US dollar basis for 30-year contracts plunged to its most negative this year in late May, and has stayed near those levels even after the Federal Reserve flooded markets with liquidity.
That is indicative of how Japanese investors are paying a higher premium to swap their currency for US dollars for the long term.
As investors tussle with strategies in a virus-stricken world, where unprecedented liquidity from central banks is driving every market, the Japanese are diving deeper into riskier assets.
With the Bank of Japan (BOJ) predicting that negative rates will remain until 2023, there is little incentive to hold on to the yen.
"The presence of the Japanese as the main carry-trade driver seems to be growing as they must turn to overseas investments," said Eiichiro Miura, general manager of the fixed income department at Nissay Asset Management.
Thirty-year cross-currency basis for yen-US dollar dropped to a record low of -76 basis points (bps) in May, and was at -64 bps on Thursday. That is a gauge of how flush banks and investors are with yen as they seek to swap it for the greenback.
The BOJ said on Wednesday that it would provide ample liquidity without any limits.
Demand for higher-yielding American assets has been growing. In April, Japan's money managers bought the most US corporate debt in eight years and the second-highest amount of equities in five years, said the latest Treasury Department data.
"Japanese investors use yen to fund purchases of Treasuries or US corporate bonds, for instance, to seek credit spreads and these flows are continuing," said Koichi Sugisaki, a strategist at Morgan Stanley MUFG Securities in Tokyo.
"Japan as a capital exporter cheapens yen's premiums," he added. "That is reflected in the difference in cross-currency basis swaps."
The rush to dump yen is one reason why the traditional haven currency has not strengthened against the US dollar even during the peak of the novel coronavirus fears, said Nissay's Mr Miura.
The yen has risen just 1.6 per cent against the greenback this year.
Japanese investors will have a bigger influence in currency markets, shading the foreign carry-trade flows where overseas funds borrowed in yen to invest in higher-yielding assets, he said.
"Carry-trade incentives seem to be getting stronger for Japanese investors, while transactions by short-term foreign players shorting yen to lock in higher-yielding assets appear to be decreasing," said Mr Miura. BLOOMBERG