Japanese selling off record foreign bonds, likely Treasuries too

TOKYO: Japanese investors sold a record amount of foreign bonds on a net basis last week, offloading nearly US$23bil’s worth, amid concerns over US lawmakers might not reach a deal to raise the federal debt limit by mid-October and avoid a historic default.

Japanese investors sold a net 2.226 trillion yen ($22.9 billion) in foreign bonds in the week through Oct 5, Ministry of Finance data released on Thursday showed.

That was the largest amount since the ministry began collecting the data in 2005, and ended three straight weeks of net buying totalling 1.77 trillion yen.

With pressure rising and no clear path forward for breaking their fiscal impasse, President Barack Obama launched a series of White House meetings with lawmakers on Wednesday to search for a way to end a government shutdown and raise the borrowing limit by Oct 17.

If a deal is not reached by the deadline, the US could default on its debt, an outcome that is unthinkable for the global economy.

"It's probable that some of the Japanese money got out of Treasuries," said Tadashi Matsukawa, head of Japan fixed income at PineBridge Investments.

Japanese investors, including banks, pension funds and life insurance companies, had 40% of their debt holdings in U.S.-denominated bonds as of the end of 2012. Analysts say a large chunk of them are in US Treasuries.

Yields on benchmark 10-year US Treasuries hit their highest closing level in two weeks on Wednesday at 2.661%. Yields move inversely to prices.

By contrast, the 10-year Japanese government bond yield stood at 0.655%, near a five-month low of 0.625% touched last week.

Tomoaki Shishido, a fixed-income analyst at Nomura Securities, said the large selling by Japanese investors might have had more to do with booking Treasuries-related losses in the first half of Japan's financial year, than with the US government shutdown.

The 10-year U.S. Treasury yield rose 76.3 basis points from the end of March to Sept 30.

"That probably reflected selling for the half-year book closing at the end of September. Japanese investors typically do some operations for accounting purposes at the end of March and September," Shishido said.

"I don't think there is panic selling among Japanese investors. Some people are selling the bonds that have interest payments during later October to mid-November but most are essentially stuck with what they've got," he added.

Foreign investors also turned net sellers in Japanese equities, with 27.1 billion yen of outflows last week, after fourth straight weeks of buying – Reuters.