Japanese investors sold the most U.K. sovereign bonds in 14 years in November, with concern over Britain¡¯s fiscal outlook and higher yields in the domestic market sapping demand for gilts.
Net sales totaled ?351.4 billion ($2.2 billion), the highest for any month since September 2011, Japan¡¯s latest balance-of-payments data showed on Tuesday. Sovereign bonds refer to debt issued by governments, government agencies and local governments.
Volatility in the U.K. bond market stayed elevated in the last quarter of 2025. Gilts posted their best performance in almost two years in October, with expectations for more Bank of England interest-rate cuts powering the move. However, yields rebounded in November amid concern that authorities were struggling to rein in the budget deficit.
¡°Yields fell sharply in October, so naturally you¡¯d sell into that move¡± amid a highly uncertain outlook for the U.K. market, said Hideo Shimomura, a senior portfolio manager at Fivestar Asset Management Co. in Tokyo. ¡°If anything, it looks like relief selling.¡±
The appeal of U.K. debt also faded as the yield premium over Japanese government bonds narrowed. For 10-year notes, the spread shrank nearly 100 basis points between early January 2025 and the end of October, as Japanese yields rose on speculation the central bank would tighten policy further to curb persistent inflation.
As expectations for a rate increase at the Bank of Japan¡¯s December meeting intensified, there was ¡°a situation in which Japanese investors necessarily had to consider both the prospect of higher domestic interest rates and valuation risks on foreign bonds,¡± Shoki Omori, chief desk strategist at Mizuho Securities Co. in Tokyo, wrote in a research note. ¡°U.K. sovereign bonds, which tend to have relatively long duration and high price sensitivity to interest-rate movements, appear to have been a natural focus for risk reduction prior to the policy shift, resulting in concentrated sales.¡±
The BOJ raised the policy rate by 25 basis points in December, with Gov. Kazuo Ueda signaling more rate hikes.
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