(May 20): Pacific Investment Management Co (Pimco) is seeing an opportunity in Japan’s 30-year sovereign bonds at a time when concerns over inflation and government spending have pushed those yields to record highs.
Marc Seidner, the chief investment officer of non-traditional strategies, said Japan’s yield curve has become “too steep” relative to other developed markets, creating attractive value in longer-dated debt. The firm has bullish positions on 30-year bonds and bearish bets on 10-year notes on expectations that the gap between the two will narrow.
“There is an excess risk premia that is attractive on an absolute basis and relative to many, many other markets,” Seidner said in an interview in Singapore.
Japan’s yield curve is the steepest in developed markets, reflecting investor concerns that the Bank of Japan (BOJ) has been too slow to raise interest rates as well as growing unease over the country’s long-term fiscal spending. Prime Minister Sanae Takaichi added to those worries this week by calling for an extra budget to cushion the impact of higher commodity prices.
The gap between Japan’s 10- and 30-year bond yields currently stands at around 130 basis points, down from as high as 171 basis points in September, data compiled by Bloomberg showed. That’s still wider than 52 basis points in the US and 67 basis points in the UK.
Seidner said the spread between Japan’s 10-year and 30-year yields has already started to narrow. “It has normalised to a degree. It still is one of the steeper yield curves in the world, which is why we would continue to hold,” he said.
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Super-long bond yields dropped on Wednesday as a 20-year debt auction drew strong demand. The yield on 20-year bonds fell 5 basis points, while 30-year yields slid 6.5 basis points.
Markets have debated what could drive further compression in Japan’s yield curve, with factors including additional BOJ rate hikes, easing fiscal concerns and improving investor sentiment seen as catalysts.
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It’s “probably a little of all of the above,” Seidner said.
Japan’s economy grew much faster than expected at the start of the year, supporting the case for further interest-rate hikes. A BOJ board member also called for rates to be increased as soon as possible provided there is no sign of the economy running into trouble.
Japanese debt have lagged peers, with a Bloomberg index tracking local-currency bond returns down 4.1% this year, compared with a 1.7% loss for a global benchmark.
Foreign investors have started pulling back from the nation’s super-long government bonds. Life insurers, historically among the largest buyers of Japanese debt, have also been paring back purchases, adding pressure to longer-dated securities.
“That to us creates an interesting opportunity and an attractive valuation entry point to buy some 30-year JGBs (Japanese government bonds),” Seidner said. “We think long bonds, the longs and super longs look quite good.”
Seidner, who has 38 years of experience in financial markets, helps oversee more than US$36 billion ($46.12 billion) at Pimco, including the firm’s Dynamic Bond Fund.
The fund has outperformed about 90% of peers in the past year, posting a 6.1% gain during that period, according to data compiled by Bloomberg. By comparison, Bloomberg’s Global Aggregate Total Return gauge has advanced about 2.4% over the same period.
Uploaded by Tham Yek Lee
