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Friday, September 14, 2007

Japanese Appetite For US Bonds On The Rise?

Japanese investors bought more foreign bonds in net terms last week than at any time in the last two years. The appetite for US bonds seems to have been boosted, rather than deterred, by increasing expectations of a cut in the US benchmark interest rate.This would seem to be for the rather perverse reason that if the Fed have to lower interest rates this is probably an indication that the US economy may be rather weak going forward, and since the Japanese economy is effectively dependent on exports to the US - even if via the Asia route - then the likelihood of any kind of raise form the BoJ in the near future drops steadily towards zero.

As predictions of a cut in the Fed funds rate continued to multiply, investors rushed into US government bonds before prices became even higher, analysts said. Net buying soared to Y1,392bn compared with Y140bn the week before, the finance ministry said on Thursday.

News last Friday of a drop in US employment turned the flow to US bonds into a stampede. These were particularly attractive because prices of Japanese government bonds are unlikely to rise further because yields are already so low.

Akihiko Yokoyama, government bond strategist at JPMorgan, said: “Probably US interest rates should be much lower than current levels. [But] can you really believe Japanese yields can fall?”