Despite Black Friday upon us and Cyber Monday on the horizon, it’s been Japanese investors on a U.S. bond shopping spree since 2016.
In particular, September of this year saw a marked increase in U.S. bond purchases by the Japanese as investors snatched up a net 2.28 trillion yen ($20 billion) of the debt based on a balance-of-payments data from the Asian nation’s Ministry of Finance. September was also when the U.S. Federal Reserve hiked interest rates for the third time and the general consensus is a fourth rate hike will end 2018, causing an influx of Japanese capital into U.S. bonds.
“Japanese investors may be increasing purchases of unhedged U.S. sovereign bonds as the perception toward dollar-yen improved after the Fed’s tightening,” said Eiichiro Miura, general manager of the fixed-income investment department at Nissay Asset Management Corp. in Tokyo
Japanese Investors Buy European Debt
The bond buying wasn’t just relegated to United States Treasuries as Japanese investors were also large buyers of debt in European countries like Germany, Spain and France. Italy saw the most selling by the Japanese as investors divested themselves of the embattled country’s debt while it struggles with budgetary issues and the European Union.
Hold the Hedging, Please
The positions obtained in U.S. debt by Japanese investors also came unhedged as the costs to hedge currency positions in the U.S. were deemed too expensive. Analysts posit that purchases in U.S. debt likely continued in October as investors are eyeing the December rate hike.
“As the Fed is pretty bullish on interest rate hikes to neutral levels, this is supporting the dollar against the yen. So some investors seem to be buying U.S. bonds without currency hedging,” said Naoya Oshikubo, senior manager at Sumitomo Mitsui Trust Asset Management.
Oshikubo also cites upside in the U.S. dollar as trade wars continue between the U.S. and China. U.S. President Donald Trump and Chinese President Xi Jinping are scheduled to meet later this month at the G-20 Summit in Buenos Aires.
Pre-Thanksgiving Flight to Bonds
In the meantime, U.S. investors have been fleeing to bonds as pre-Thanksgiving stock market declines have caused the Dow Jones Industrial Average to shed 3% the last five days. For investors beginning their journey into bond ETFs, short-term investment-grade exchange-traded funds (ETFs) would be a prime place to start like the iShares 1-3 Year Credit Bond ETF (NASDAQ: CSJ).
CSJ tracks the investment results of the Bloomberg Barclays U.S. 1-3 Year Credit Bond Index where 90 percent of its assets will be allocated towards a mix of investment-grade corporate debt and sovereign, supranational, local authority, and non-U.S. agency bonds that are U.S. dollar-denominated and have a remaining maturity of greater than one year and less than or equal to three years–this shorter duration is beneficial during recessionary environments.
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