foreign JGB ownership continues to rise
The Bank of Japan announced last week that foreign ownership of its government bonds has now reached the highest level since 1979.
The foreign investors piling in aren’t individuals like you and me. They’re mostly professional bond investors who manage mutual funds and institutional pension accounts and, to a lesser extent, non-Japanese central banks.
What’s the attraction?
To the layman’s eye, there would seem to be none. The Japanese economy hasn’t grown much for over two decades. The Tokyo government continues to borrow heavily to run its operations, so the stock of JGBs continues to expand. And interest rates are extremely low.
There are, however, two positives.
90% or more of Japan’s government bonds are held by Japanese citizens and institutions. They regard JGBs as the ultimate safe investment. They also see themselves as having little other choice (without taking unacceptably high amounts of risk) than to continue to hold. They roll their money over into new bonds when their current bonds are redeemed, too. So–unlike the case with, say, US Treasuries, where foreigners own about half the outstanding bonds–there’s little chance of the JGB market being roiled by panicky foreigners repatriating funds to the their home markets.
Also, the Japanese economic situation is well-known. It has been for all practical purposes unchanged for over two decades. Chances of any change appear to be slim. To boot, in the deflation-prone Japanese economy, low yields look somewhat better in inflation-adjusted terms.
In other words, although you won’t make much money–other than a possible currency gain–the chances of a loss appear to be very small. That’s what makes Japan so attractive to global bond professionals.
not so in the rest of the world
The sub-prime mortgage crisis in the US and the Greece/Italy/Spain government debt crisis in the EU have driven bond yields for Treasuries and for German governments to within striking distance of JGB yields. In fact, short-term German government notes trade at negative yields.
Inflation-adjusted, Treasury yields are already negative, as well. It’s possible that economic recovery now under way will eventually cause inflation to rise further, worsening this situation–and causing the Fed to raise rates.
In Germany’s case, if the Eurozone is to survive it looks like Germany will have to accept more inflation than it traditionally has been willing to do. It will also bear a large amount of the cost of bailing out profligate Spain and Italy. (Greece? It’s too small to matter; my personal bet is that Athens will be eventually expelled from the EU.)
Marketers of bond funds continue to tell us that bonds are a good place to have our money. If we look at what those managers are doing with any funds we give them, however, we see the best low-risk option they’re able to find is Japan, whose virtue is that losses will probably be minimal.
Another case of: watch what they do, not what they say.