- U.S election risk prompts investors in Japan to cut U.S treasury holdings.
- Federal Reserve had promised to lower rates for more extended diminishing returns on U.S Treasuries.
- Many investors in Japan have been bullish on Spanish bonds as high dollar-hedging costs affect the profits.
Japanese bond fund reduces U.S treasury holdings ahead of the forthcoming presidential elections in the United States.
Before now, the Federal Reserve promised to keep rates low for longer, diminishing returns, but November presidential elections give Japanese investors another reason to avoid treasury holdings.
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The chief executive chief fund manager at Mitsubishi UFJ Kokusai Asset Management Co. Tatsuya Higuchi stated:
“Markets can become unstable as political noises get louder with the presidential election approaching.”
He also added that the firm reduced its 388.6 billion yen ($3.7 billion) bond fund treasury holdings while favoring Spanish and Australian sovereign debt.
The reduction in MUFJ’s bond fund comes in a time when there was a massive supply on demand for U.S government debt, which is estimated to be more than $1 trillion in net bond sales through December.
Spanish bonds favored
MUFJ’s bond, whose total assets are equivalent to $121 billion, bought bonds from Spain despite the looming political unrest resulting from the forthcoming presidential elections.
However, Higuchi says that better economic fundamentals than some of the major economies in the Eurozone mean that Spanish bonds have the potential to do well.
His confidence in Spanish bonds is such that Spain’s debt made up to 12.3 percent of MUFJ’s flagship Global Sovereign Open fund at the end of January, making it the fund’s highest single-country holding after the United States Treasuries.
Many investors in Japan have been bullish on Spanish bonds. As high dollar-hedging costs affect the profits on Treasuries, the Eurozone has become enticing to Japanese funds.
It is essential to know that Spain, especially, is superior due to this higher economic growth and lower liquidity levels, as hedged funds from Spanish funds for Japanese investors exceed those from the United States and Germany bonds since last year.
MUFJ’s chief executive-chief fund manager believes that the upcoming presidential elections will turn Japanese investors to Spain.
However, Mitsubishi UFJ Kokusai’s Global Sovereign Open fund reduced its Treasury holdings to 35.4 percent as of Aug. 31 – its lowest position since October 2014. It was at 39.2 percent in July. Higuchi said:
“No matter who gets elected, they’ll focus on fiscal policy to recover the economy ruined by the coronavirus, and it may take a sometime before we could confirm the key agenda from candidates.”
Adding Australian debt
Japanese bond fund increased its holdings of Aussie sovereign bonds to 2.8 percent from 0.3 percent in January. Higuchi said that Aussie bonds offer better yields, and it is much easier to increase exposure to Australia’s Reserve Bank yield-targeting policy.
“Demand for natural resources could pick up, and Australia could benefit from recoveries in China and other parts of Asia.”
As the U.S presidential election kicks off in a few months, Japanese investors will look for more ways to protect their bonds and stocks.