Japan: Steady buying of AUD bonds, could slow ahead - Nomura

Japanese investors maintained a solid pace of AUD bond buying in December, with purchases again running at an above-average pace, notes the research team at Nomura.

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“Interestingly, this has been increasingly tilted towards bonds issued by Australian residents over the past few months, rather than Kangaroos including SSAs. December also capped another solid year for Japanese interest in AUD bonds, with net purchases totalling AUD17.8bn, down a little from 2016’s strong pace, but another above-average result nonetheless. Global flow data for January also show solid buying of foreign bonds from Japan, led by pension and lifer interest; over recent months, this has been directed towards European and US agency paper and AUD bonds, with net sales of USTs likely a function of rising FXhedging costs.”

“We expected to see continued inflows into AUD bonds, reflecting higher outright yields, lower FX hedging costs and some improvement in relative value against USTs; we also thought this could help prevent any widening of Australian-US long-end bond spreads. However, over recent weeks, higher hedging costs have more than offset a modest further rise in ACGB yields and following outperformance against USTs – with the 10 year spread narrowing to 0bp – the relative attractiveness of ACGBs has declined. The implications are that the pace of buying from Japan could slow a little and further outperformance against USTs may prove more difficult to achieve in the near term. While a weaker AUD/JPY might provide a more attractive entry point, the lower level of USD/JPY and AUD/JPY appears to have come as a surprise to many, and greater uncertainty and volatility is more likely to send some Japanese investors to the sidelines, in our view.”