Japanese investors' euro zone bond buying hits record high in July

TOKYO: Japanese investors bought a record 2.585 trillion yen ($23.86 billion) (19.83 billion euros) of euro-denominated bonds in July, data from Japan's Ministry of Finance showed, spurred by a spike in their yields.

That was way above the previous record of 1.449 trillion yen marked in September 2012, and came after big selling earlier this year on concerns over the direction of European politics before the French presidential elections.

Japanese investors jumped in when bond yields rose after European Central Bank President Mario Draghi sparked expectations of tapering of its monetary stimulus in a speech late June.

The 10-year German bund yield hit a high of around 0.59 percent from about 0.25 percent within a span of three weeks following Draghi's comments in Portugal.

"European bond yields saw extraordinary rise following Draghi's tapering speech," said Makoto Noji, senior strategist at SMBC Nikko Securities.

"A lot of investors also felt sympathy with Europe, in a way, as European economies look similar in terms of demography etc, and they felt bond yields have risen too much," he said.

On Thursday, Draghi signalled that the central bank could make a decision on its stimulus in October, but he also cautioned that the euro's strength was starting to weigh on the bank's calculations.

The German bund yield fell to around 0.30 percent after his comments.

In July, Japanese investors bought 993 billion yen of German bonds, their biggest net purchase since May 2013, when they bought 1.102 trillion yen.

Buying of French bonds shot up to 1.305 trillion yen, the biggest since May 2014.

Appetite also spilled over beyond the two core markets, with net buying in Italian bonds hitting 162 billion yen, the largest since April 2016.

In addition to the appeal of surging bond yields, Japanese investors also favoured European bonds as they could profit from currency hedging on their euro bond investments.

Short-term euro zone interest rates are deeper into negative territory than in Japan and is in sharp contrast to the dollar, hedging for which costs Japanese investors dear as dollar interest rates are higher.

Many Japanese institutional investors are keen to limit exposure to currency risks and a large part of their bond investment is currency-hedged.

However, their appetite for European bonds, particularly German bonds, may be ebbing now as yields have since dropped back.