Japanese investors sell foreign bonds for third straight week as Treasury yields jump

Japanese investors pulled back from foreign bonds for a third straight week through October 3, as surging US Treasury yields and rising returns at home sapped appetite for overseas debt.

They sold foreign debt worth a net 503.6 billion yen ($3.19 billion), although this was the smallest weekly total in the past three weeks, data from the Ministry of Finance showed.

The US 10-year Treasury yield hit a 24-1/2-year high of 5.3645% on Wednesday, amid concerns over inflation and government debt. Japan's 10-year government bond yield also reached a 30-year high of 3.122% earlier this week.

Bonds Corner Powered By Japanese investors sell foreign bonds for third straight week as Treasury yields jump

In a significant market shift, Japanese investors have divested from foreign debt for three consecutive weeks amidst climbing domestic yields. As US Treasury yields hit record highs, local bonds present a more appealing alternative. This trend not only sees a resurgence in Japanese stock acquisitions but also marks a recovery in foreign investments into Japanese long-term bonds, reversing earlier outflows.

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Rising Japanese rates are beginning to lure some of the country's vast overseas investments home, marking a notable shift in global capital flows.

Japanese investors have made net foreign bond sales of about 5.08 trillion yen so far this year, the most since 2022. The outflows could support the yen and pressure bond markets where Japan has been a major buyer for decades.

The narrowing yield advantage of overseas debt, compounded by the cost of hedging foreign-currency exposure, has made Japanese government bonds increasingly competitive with US and European securities.

"Among Japanese investors who have been hunting higher yields overseas, it makes sense that they will start to bring their funds home to the JGB market," said Guillermo Felices, global investment strategist for fixed income at PGIM.

"It's becoming a lot more attractive for Japanese investors," he added.

On Tuesday, Sumitomo Mitsui DS Asset Management said it had recently sold some French government bonds in favour of German and Japanese debt, as France's borrowing costs climbed to their highest since the 2000s.

Meanwhile, Japanese investors bought a net 1.32 trillion yen of foreign stocks during the week, their largest weekly net purchase since August 15.

Japanese long-term bonds attracted net foreign inflows of 585.7 billion yen, ending a two-week streak of outflows as overseas investors returned to the market.

Foreigners also bought a net 2.19 trillion yen of Japanese stocks, snapping a three-week run of outflows.
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