Bloomberg News

Japanese Shun Bunds to Purchase Most Gilts in Three Years

November 29, 2011

(Updates with details of German bond sale in sixth and seventh paragraphs.)

Nov. 24 (Bloomberg) -- Japanese investors are buying more bonds in the U.K. than in any other nation overseas as Europe’s struggle to control its debt crisis left Germany unable to complete a sale of securities yesterday.

Money managers in Japan scooped up 1.53 trillion yen ($19.9 billion) of U.K. gilts in 2011 through Sept. 30, set for the biggest annual purchase since 2008, Ministry of Finance data showed on Nov. 9 in Tokyo. Japanese investors unloaded the most debt in Germany, totaling almost 1.46 trillion yen, followed by sales in Italy and France, the figures show.

Demand for gilts has pushed 10-year yields to parity with German bunds for the first time since 2009 and to levels unseen in two decades against Japanese debt. Nissay Asset Management Corp., Mitsubishi UFJ Asset Management Co. and Mizuho Asset Management Co., which manage a combined $192 billion, are all bullish on U.K. bonds after investors pulled money out of Europe, sending Italian and Spanish yields to euro-era highs.

“We prefer U.K. gilts as a safe haven,” said Shinji Kunibe, Tokyo-based the chief portfolio manager for fixed income at Nissay, which manages the equivalent of $71 billion. “The flight to quality looks quite rushed. If this kind of movement continues, Germany will not be immune.”

Nissay, part of Nippon Life Insurance Co., Japan’s largest life insurer, is swapping euro-denominated bonds for U.K. gilts, Kunibe said in a telephone call Nov. 16.

‘Disaster for Germany’

Germany, Europe’s biggest economy, failed to get bids for 35 percent of the 10-year bonds offered for sale yesterday. Yields on Germany’s 10-year debt soared 23 basis points, the biggest jump since 1990, to 2.15 percent.

“This auction is nothing short of a disaster for Germany,” Mark Grant, a managing director at Southwest Securities Inc. in Fort Lauderdale, Florida, said by e-mail. “If the strongest nation in Europe has this kind of difficulty raising capital, one shudders concerning the upcoming auctions in other European nations.”

Ten- and 30-year yields on gilts slid to records yesterday as minutes of the Bank of England’s most recent meeting showed some policy makers said an increase in stimulus may be needed.

BOE Purchases

The BOE decided last month to increase its program of government debt purchases by 75 billion pounds ($117 billion) to 275 billion pounds as it seeks to support the economy in a policy known as quantitative easing. Bank Governor Mervyn King said inflation may fall “sharply” in the next six months in a letter to Chancellor of the Exchequer George Osborne on Nov. 15.

Ten-year gilt yields fell to as low as 2.1 percent and 30- year rates touched 3.06 percent yesterday, the least on record for both, according to data compiled by Bloomberg.

The extra yield investors get for buying 2021 debt in Britain instead of in Japan shrank to 1.18 percentage points yesterday, the least based on Bloomberg data that begin in 1989.

The U.K.’s 10-year yields will drop to 2 percent by year- end, said Hideo Shimomura, who helps oversee the equivalent of $77.9 billion as chief fund investor at Mitsubishi UFJ Asset Management, a unit of Japan’s biggest bank.

“There’s a fear of a recession,” Tokyo-based Shimomura said on Nov. 16. “They’re doing a lot of quantitative easing.”

Pacific Investment Management Co., which runs the world’s biggest bond fund, said the BOE’s purchases of gilts may help the debt beat other sovereign bonds, according to a Nov. 14 report by Ketish Pothalingam and Luke Spajic, portfolio managers for the company in London.

Gilts Outperform

U.K. government debt has returned 15 percent this year as of Nov. 23, versus 7.4 percent for German bunds, 9.7 percent for Treasuries and 2.1 percent for Japanese government bonds, according to Bank of America Merrill Lynch indexes. Gilts handed investors 9.3 percent after accounting for changes in the pound against the yen, the figures show.

New governments in Greece, Italy and Spain are attempting to tackle the region’s crisis that sent yields soaring on concern the nations will have trouble repaying debts.

There’s a risk that the euro will drag down the pound, said Yoshiyuki Suzuki, who helps oversee the equivalent of $71.4 billion as the Tokyo-based head of fixed income at Fukoku Mutual Life Insurance Co.

“The pound and the euro should move in tandem,” Suzuki said in a phone call Nov. 16. “The U.K. is heavily reliant on the European economy.”

Fukoku Mutual is refraining from buying gilts and is increasing hedges to protect its holdings in case the euro or the pound fall against the yen, he said.

Mizuho Buys Gilts

Mizuho Asset in Tokyo bought gilts earlier in 2011, according to Akira Takei, the head of the company’s international fixed-income department.

“With the financial debacle in the European continent, the U.K. tends to be a safe haven,” said Takei, who helps oversee the equivalent of $42.8 billion in assets at the unit of Japan’s third-largest publicly traded bank by market value. “It first started with Greece, then into Portugal and Ireland, and now into Italy, Spain, Belgium, France and Austria. My hunch is that the final destination would be Germany,” he said on Nov. 17.

The only place topping the U.K. as an investment destination for Japanese bond managers this year is the Cayman Islands, with purchases of 2.99 trillion yen, based on Finance Ministry data. The region, a British territory, is popular as a tax-exempt destination with a minimum of government regulations, according to a U.S. State Department website.

--With assistance from Theresa Barraclough in Tokyo, Candice Zachariahs in Sydney and Paul Dobson in London. Editors: Naoto Hosoda, Garfield Reynolds.

To contact the reporters on this story: Kristine Aquino in Singapore at kaquino1@bloomberg.net; Wes Goodman in Singapore at wgoodman@bloomberg.net

To contact the editor responsible for this story: Rocky Swift at rswift5@bloomberg.net


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