Vanguard Asset Management, previously one of the biggest bulls on Japanese government debt, hit pause on a steady buying spree of the nation¡¯s long-dated bonds at the start of the year.
The asset manager stepped away from its bet before Prime Minister Sanae Takaichi¡¯s decision to call a snap election and pitch for deep tax cuts roiled the Japanese debt market, propelling yields on long maturities nearly 30 basis to record highs.
¡°It¡¯s been a perfect storm for long-dated JGBs (Japanese government bonds),¡± said Ales Koutny, head of international rates at Vanguard¡¯s active funds, adding ¡°there are limits to how much unfunded fiscal spending a country can do.¡±
Koutny had been among foreign investors piling into long-dated Japanese government bonds in anticipation that more interest-rate hikes by the Bank of Japan would flatten the yield curve and prompt more demand for longer-dated debt. While many investors continued to buy, even as yields continued to soar after Takaichi took office in October, the latest jump and a crank up in volatility is testing investors¡¯ appetite.
Weak demand at a 20-year auction on Tuesday, alongside a report showing that Japan¡¯s life insurers have been selling long-dated bonds and ¡°noise¡± around further fiscal spending, have all led to the surge in the 30-year yield, according to Koutny.
What has riled investors is Takaichi¡¯s promise to temporarily lower sales tax on food in order to strengthen her slim majority in the country¡¯s Lower House. The move renewed concerns about her desire to pursue expansionary fiscal policies.
With Japan relying on more than 20% of its revenue from consumption tax, Koutny said, ¡°any tinkering around there has a meaningful impact for the fiscal position of the government.¡±
To be sure, not all fund managers have been scared off by the recent turmoil. Ranjiv Mann, a senior portfolio manager at Allianz Global Investors, said he was ¡°actively discussing potential opportunities¡± in Japanese government bonds Tuesday, while as recently as last week, Pacific Investment Management¡¯s Andrew Balls saw opportunities in market volatility.
For Vanguard¡¯s Koutny, a shift to more prudent fiscal spending plans or a hawkish turn by the BOJ to commit to a rate hike in March or April ¡°would be key for us to resume any buying.¡±
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