(Bloomberg) — Investors are rethinking their strategies for Japanese sovereign bonds after the Bank of Japan’s pivot to interest-rate hikes in the past year triggered the biggest losses among global debt markets.
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Key to their shift is the outlook for bond yields in the next 12 months, with some market participants predicting that benchmark 10-year borrowing costs won’t climb as sharply as the fiscal year that ends today, when rates more than doubled.
Japanese notes lost 5.2% over the past year when fluctuations in exchange rates aren’t considered, the worst performance among 44 global markets tracked by Bloomberg. That’s the sixth straight year of losses for Japan’s sovereign debt, and the biggest since 1990, as the BOJ hikes rate when other central banks are cutting them.
“Japan’s yields used to move in line with US yields or other overseas yields,” said Yurie Suzuki, a market analyst at Mizuho Securities Co. “But there were a lot of cases this past year where Japan’s yields rose even when US yields were falling” due to diverging policy paths, she said.
A steady rise in yields have prompted investors such as Pacific Investment Management Co. and the National Mutual Insurance Federation of Agricultural Cooperatives to rethink their stance toward Japan’s ¥1,138 trillion ($7.6 trillion) bond market. Some fund managers expect the 10-year yield to climb as high as 2% from 1.545% on Friday.
The losses come after the BOJ raised rates three times since scrapping the world’s last negative interest rate policy last March. Other central banks from the US to the euro region are easing monetary policy, with Switzerland’s interest rates now below those of Japan.
Japan’s yields have hit multi-year highs, with the 10-year rate rising to its peak since 2008 last week.
“The trend is for gradually higher rates,” said Shinichiro Kadota, head of Japan FX and rates strategy at Barclays Securities Japan Ltd. “But we have seen a significant move already over the last year so, in that sense, I think the pace of the selloff in JGBs will be milder than the past 12 months.”
A Bloomberg survey of economists and strategists shows the 10-year yield is expected to finish the fiscal year through next March at 1.66%. Should this play out, an investor who buys the securities today will still gain 0.6%, according to Bloomberg-compiled data.
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