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Bond giant Pimco has been buying long-term Japanese government debt to take advantage of what its global fixed income chief Andrew Balls called a “dislocation” in the market.
Japanese government bonds have been hit hard in recent months as a resurgence in inflation and a decline in demand from traditional domestic buyers transforms the market. That has taken yields on long-dated debt to record levels and prompted authorities to consider measures to support bond prices.
“When you look at the Japanese curve, it looks dislocated,” Balls, Pimco’s CIO for global fixed income, told the Financial Times. “In some of our portfolios, we’ve bought the long end of the Japanese curve because you can see the potential, there’s a trading opportunity.”
The manager, an arm of Germany’s Allianz, has bet on 30-year Japanese sovereign debt, whose yield surged above 3 per cent in May. That has meant a significant fall in the price of the debt that spent much of the past decade with a yield below 1 per cent during Japan’s negative interest rate era.
Japan’s bond sell-off, which has been more pronounced than the decline in other big markets, has prompted the Bank of Japan to say this week it will move more slowly to cut back its bond purchases, while Japan’s finance ministry has been consulting bond-trading banks about whether it should scale back issuance of long-term debt.
On Friday, Japan’s finance ministry discussed with banks a plan to cut issuance of super long bonds by a total of ¥3.2tn ($22bn) during the current fiscal year to March.
It is highly unusual for the government to change its issuance plans midway through a fiscal year, without a change in the budget. The potential move reflected elevated anxiety within the government over the bond market, said strategists in Tokyo.
The proposed reduction of issuance was more severe than officials had previously indicated, and will be applied to 20-, 30- and 40-year Japanese government bond tenors, offset by a boost to issuance of short-term debt.
Speaking before the meeting, Balls said there was a “strong case” for Japanese authorities to “issue more in the parts of the curve where the demand is”, given the declining demand for long-term debt from Japan’s life insurers. He said his view on issuance had been strengthened by the market fallout from Donald Trump’s “liberation day” tariff announcement, which sent borrowing costs higher around the world.
Japan’s challenge is shared by other big economies such as the UK and the US as they face growing pushback from the market on the terms of their long-term borrowing. The UK is already shortening the maturity its debt issuance, given declining demand for long-dated bonds in particular. Despite their sharp rise, Japan’s borrowing costs are still well below those in other big economies, with the US 30-year bond yield at about 4.9 per cent.
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Pimco’s Balls said there was a limit to how high global long-term borrowing costs could go before they started “feeding back” in equity and credit market volatility. That could then lead to central banks “having to react”, he added, pulling policy rates lower and supporting bond prices.
Fuelling the sell-off in long-dated Japanese debt has been a run of poorly received bond auctions as analysts point to a so-called “buyers’ strike” by life insurers and other domestic investors that have been forced by shifting economic circumstances to change their buying strategies.
Concerns are also running high that a highly challenging Upper House election scheduled for next month could result in all parties pledging schemes that would ratchet up fiscal spending.
Koichi Sugisaki, a rates strategist at Morgan Stanley MUFG, said that falling demand from traditional domestic Japanese investors may leave a greater role to be played by overseas investors.
“[That] can hardly be considered good for market stability, given that such investors are known for being comparatively quick to take profits or cut losses when interest rates move,” wrote Sugisaki in a note to investors.
