UST yields becoming more attractive for Japan lifers – Nomura

Research Team at Nomura, suggests that after the surprising US election outcome, US yields rose quickly, after declining initially and the quick turnaround in global yield curves surprised Nomura, while it likely surprised most Japanese investors too.

Key Quotes

“Major lifers expected 10yr UST yields to stay around 1.41-2.06% during H2 FY2016, on average. Their average end-March target was 1.78%. After the strong rise in yields, UST 10yr yields are now at the upper end of the average forecast range. In contrast, as the BOJ’s yield curve control policy is capping the upside room for JGB 10yr yields, they are still firmly within the forecast range. US political uncertainty remains high after the presidential election, but US yields are becoming even more attractive than lifers expected. Lifers tend to accelerate foreign bond investment when super-long-term yield spreads widen, which suggests foreign bond investment by lifers will likely remain strong.

Thanks to higher US yields, even after FX hedging, UST 10yr yields are slightly higher than JGB 20yr yields for the first time since July. The current level of USD/JPY and EUR/JPY is also higher than major lifers’ average end-March target. Bond market volatility in Japan and the US is also an important driver of lifers’ foreign bond investment. Higher implied UST volatility could work negatively for lifers’ foreign bond investment for the time being too. Thus, lifers could see hedged foreign bond investment as more attractive than unhedged investment. Nonetheless, more attractive US yields relative to Japanese yields could encourage unhedged foreign bond investment especially when USD/JPY dips.”