Japanese institutional investors are increasing their holdings of bonds denominated in US, Australian and Canadian dollars as they seek to balance diversification and higher yields with stability.
Minako Endo, RBC’s managing director for Japan and head of institutional sales, told FinanceAsia in an interview that domestic pension funds, insurance companies and corporate treasuries are continuing to increase exposure to international debt instruments, particularly securities which are highly rated, such as so-called dollar-block bonds.
“We clearly see growing appetite for buying offshore bonds, partly as many of the big pension funds and institutional investors are seeking stable, alternative assets to generate higher returns,” said Endo.
Japan’s Government Pension Investment Fund, the world’s largest pension fund with assets worth $1.1 trillion raised its allocation to foreign bonds to 15% from 11% last October.
Earlier this year, Japan overtook China as the largest foreign holder of U.S. Treasuries for the first time since the 2008 financial crisis, as the reflationary pressures of so-called Abenomics forced Japanese Government Bond (JGB) yields close to zero. The 10-year JGB yields about 0.32% compared with 1.9% on the comparable US Treasury note.
Japanese investors owned $1.22 trillion of US government securities at the end of February, compared with $1.2386 trillion at the end of January, according to the latest monthly data released by the US Treasury on 15 April.
China held $1.2237 trillion of Treasury debt at the end of February, compared with $1.2391 trillion a month earlier.
RBC, the largest Canadian bank by assets, has appointed a US Treasury trader in the region to service Japanese investors. The hire, to be formally announced in May, will be based in Hong Kong, where the regional FIC (fixed income and currencies) business is located. The appointment follows the bank’s recruitment of a Tokyo-based relationship manager for financial institutions in the third quarter of 2014 to support distribution of Australian and Canadian government bonds.
“While dollar-block bonds are seeing plenty of currency volatility against the Yen, Japanese investors are now very focused on the underlying quality of the paper and returns,” said Endo.
The Australian 10-year government bond yield has fallen to 2.35% (17 April) from 4% a year ago, and the yield on the 10-year Canadian government bond has dropped from 2.44% to 1.34% during the same period.
“Big Japanese investors see that their needs are not likely to change in the near term and want to be positioned in the securities that best meet these requirements, which include increasing international exposure without sacrificing quality,” she added.
Endo joined the bank in 2009 from Merrill Lynch after starting her career at Nomura. She is today one of the most senior female figures in the Japanese banking industry.
As head of FIC for Japan, reporting to Doug Moore, head of RBC Asia, she manages 45 FIC and equity-linked salespersons, and was appointed Branch Manager of RBC Capital Markets (Japan) Ltd in June 2012.
RBC, the 12th biggest bank in the world by asset size, is rated AA- by Standard and Poor’s, and has been present in Tokyo since 1981.
“In Japan, RBC will continue to do what it does best, distributing dollar-block products [and other global products], and building deeper relationships with clients,” said Endo.
This article has been corrected to show RBC does not distribute JGBs in Japan