Foreign investors flocked to Japanese short-term bills last week, spending a record $39 billion on the debt as they looked to take advantage of higher yields than those offered in the United States as well as the strength of the yen. Foreign investors, including banks and Asian sovereign investors, heavily bought short-term yen bills and will use currency basis swaps to take advantage of yields above those on short-term dollar bills, money traders said.
US three-month bills stood around 0.01 percent and six-month bills were about 0.05 percent. Japanese three-month government bills are yielding around 0.10 percent. Investors could earn a yield of around 0.5 percent when changing them into dollars using currency swaps, money traders said. The spread on one-year dollar/yen currency swaps jumped to above 50 basis points last week from around 20 points earlier this year, meaning investors can earn that much premium when swapping yen into dollar.
The spread tends to rise when tension in financial markets rises, and dollar funding is seen as getting tighter as Japanese banks sometimes uses currency swaps to obtain the dollar. Foreign investors were also looking to take advantage of the mighty yen, which stood near a record high against the dollar, the traders said.
"I'd imagine that Asian central banks are diversifying their foreign currency assets and purchasing yen-denominated assets. You can buy the yen, leave it, and it will get stronger," said a trader at a Japanese bank. "They're buying short-term bills to be able to shift away from them whenever possible," he said. Net buying of Japanese short-term bills by foreign investors totalled 2.98 trillion yen during the week to August 13, the highest weekly reading since the Finance Ministry revised its calculation methods in 2005.
The yen was buoyant against the dollar after the Fed vowed last week to keep interest rates near zero for two years and left the door open to adding more stimulus if needed. As of Thursday, the dollar stood at 76.61 yen , just near its record low of 76.25 reached in mid-March shortly after a massive earthquake and tsunami in north-east Japan. Foreign investors became net sellers of Japanese stocks during the week as Japanese shares came under pressure due the yen's strength and sovereign debt problems in the United States and Europe.
Foreigners' net selling of Japanese shares totalled 400.9 billion yen last week, up from 390.9 billion yen in the week that ended on August 6. Japanese investors were detected locking in profits on US Treasuries last week as concerns over a US economic slowdown and the Fed's easing sharply pushed up Treasury prices, traders said. Other traders, however, said Japanese investors may be removing foreign bonds from their portfolios to lighten their exposure to possible sovereign debt problems.
Japanese investors, including banks and life insurers, were net sellers of foreign bonds, selling 350.5 billion yen's worth last week, the ministry data showed. "I believe banks sold, aiming to collect capital gains following surges in Treasury prices over the last few weeks," said a senior fund manager at a major Japanese financial institution. "Players like life insurers may want to hold on to their existing Treasury positions as prices are expected to stay high. Though they may not want to pour fresh funds into Treasuries as they think current yield levels are too low," the fund manager said.
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