Bloomberg News

Japanese Investors Shun Spanish Bonds

April 11, 2012

Japanese investors cut their holdings of euro-denominated debt last year by the equivalent of $54.3 billion, the largest amount based on records going back to 2005, Finance Ministry figures show. Photographer: Denis Doyle/Bloomberg

Japanese investors cut their holdings of euro-denominated debt last year by the equivalent of $54.3 billion, the largest amount based on records going back to 2005, Finance Ministry figures show. Photographer: Denis Doyle/Bloomberg

Japan’s biggest investors, with $368 billion under management, say it’s too early to buy bonds from Europe’s most indebted nations as rising Spanish yields spark concern the region’s fiscal crisis has further to run.

Kokusai Asset Management Co., which runs Asia’s largest mutual fund, Mitsubishi UFJ Asset Management Co., a unit of Japan’s biggest publicly traded bank, and Diam Co., part of the nation’s second-biggest life insurer, are all shunning Spanish debt. Japanese investors sold a net $43.8 billion of euro- denominated bonds in the 12 months ended Feb. 29, according to figures from the Ministry of Finance in Tokyo.

“I’m not planning to add Spanish or Italian bonds anytime soon,” said Masataka Horii, who runs the $21.2 billion Kokusai Global Sovereign Open Fund (1131197C) in Tokyo. “The European crisis is moving toward a resolution, but that doesn’t mean the issue is fully solved. It’s not time yet to increase euros.”

The rate on 10-year Spanish bonds rose almost 1 percentage point in the past month, reaching 5.92 percent at 8:26 a.m. London time today. Yields on similar-maturity Italian debt advanced 69 basis points to 5.61 percent in the period.

Spanish borrowing costs, which reached euro-era highs in November, are surging anew as bank buying funded by European Central Bank loans runs out of steam.

Too Risky

“I won’t invest,” said Yoshiyuki Suzuki, who helps oversee the equivalent of $68 billion as the head of fixed income at Fukoku Mutual Life Insurance Co. in Tokyo. He’s avoiding the debt of Spain, Portugal, Italy and Ireland. “They’re very risky. The economic situation is very bad in the euro area and will get worse. I am focusing on French bonds and German bonds. They will be good investments.”

Ten-year German yields will fall to 1.5 percent by the end of the year, he said. The record low of 1.636 percent was set on Sept. 23.

Japanese investors cut their holdings of euro-denominated debt last year by the equivalent of $54.3 billion, the largest amount based on records going back to 2005, Finance Ministry figures show.

Horii’s fund had 9.6 percent of its assets in euro- denominated government debt, concentrated in Germany, the Netherlands and Finland, as of Feb. 29, according to the Kokusai website. Its euro holdings dropped from almost 30 percent a year earlier, the figures show. The fund sold all its Spanish, Italian and Belgian sovereign investments in 2011, according to the website. Kokusai’s total assets under management are equivalent to $46 billion.

Restructuring Worries

Mitsubishi UFJ is underweight to neutral on Spain and Italy, and doesn’t hold anything in Ireland or Portugal, said Hideo Shimomura, who helps oversee the equivalent of $73 billion in Tokyo as the company’s chief fund investor.

“Everybody is worried about Spain,” he said. “Our positions are quite limited. Spain could be downgraded one to two notches this year. There’s a 30 percent chance that Spain will become like Greece,” requiring bondholders to take a loss on their investments, he said.

Spanish government bonds have lost 2.2 percent this month, adding to a drop of 2 percent in March, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. Italian bonds slid 2.9 percent in April, while U.S. Treasuries made a 1.2 percent gain and German bonds advanced 0.9 percent, according to the indexes.

Greece’s government this year carried out the biggest sovereign debt restructuring in history to seal a 130 billion- euro ($170 billion) rescue package. Spanish Prime Minister Mariano Rajoy is stepping up efforts to reassure investors he can bring the nation’s deficit under control and avoid a bailout, after announcing on March 2 that the nation would miss its 2012 budget-deficit goal. He met this week with his health and education ministers to discuss cuts of more than 10 billion euros, the Spanish government said in a statement.

Deficit Woes

“We’re worried about the Spanish economic situation, the government deficit,” said Hajime Nagata, who helps oversee the equivalent of $120.4 billion at Diam in Tokyo.

Spanish 10-year yields need to rise to 6.5 percent before Diam will add bonds beyond the percentage in the index the company uses to gauge performance, Nagata said. Diam owned fewer bonds than suggested by its benchmark, a trade it planned to unwind once the difference between Spanish and German 10-year bonds surpassed 4 percentage points, Nagata said.

Spain’s 10-year bonds yielded 4.33 percentage points more than German bunds at yesterday’s close, the most since Nov. 25. The Italian-German yield spread climbed to 4.04 percentage points and the Portuguese spread was 10.68 percentage points.

Shunning Euros

“I’m underweight the euro,” said Kei Katayama, who buys bonds outside of Japan at Daiwa SB Investments Ltd., which oversees the equivalent of $61 billion from Tokyo, including Asia’s second-largest mutual fund. “European sovereign risks remain. They have separate budgets, separate laws and separate governments. This is a fundamental problem.”

The euro weakened by 6.4 percent in the past 12 months, according to Bloomberg Correlation-Weighted Currency Indexes, which track 10 developed-nation currencies. The dollar gained 3.8 percent during the same period and the yen strengthened 7.5 percent, the indexes show.

“Outside Europe, there are investors who would be prepared to get involved, but only once they are confident liquidity has returned,” said Mark Schofield, head of interest-rate strategy at Citigroup Inc. in London. “It’s going to be a while before we get a big uptick in demand from outside Europe and it’s going to take more support from the European administration.”

To contact the reporters on this story: Wes Goodman in Singapore at wgoodman@bloomberg.net; Monami Yui in Tokyo at myui1@bloomberg.net; Paul Dobson at pdobson2@bloomberg.net.

To contact the editor responsible for this story: Mark Gilbert at magilbert@bloomberg.net


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