The Japanese government bond market continues to offer little in the way of reward for the overseas ...
The Japanese government bond market continues to offer little in the way of reward for the overseas investors.
Royal & SunAlliance Investment Management expects yields on 10 year bonds to rise from 1.7% to 2.5% by the end of the year on the back of a strengthening of the domestic economy.
The group anticipates economic growth will hit around 1.5% this year, reaching around 2% during 2001. It forecasts the yield on five-year Japanese government bonds will go up to 1.8% from 1.1% and also forecasts that yields on 20-year Japanese government debt will rise to 2.7% from 2.16% by the end of 2000.
Dave Hooker, investment manager fixed interest at Royal & SunAlliance Investment Management, says: "This is not a market we are keen on. We believe improvement in Japanese growth is sustainable and we are looking at a big increase in yields.
"The government deficit is around 10% of GDP and the ratio of GDP to total government debt is close to 100% which is a negative for the bond market. The wild card in the equation is the yen. We are not looking for a great movement in the currency but if the dollar was to weaken against the yen that would be a reason for holding Japanese government bonds."
Alan Wilde, head of fixed interest at Scottish Mutual, says: "We have not been very active in that part of the market but Japanese government bonds have offered reasonable protection against rising yields in other government bond markets.
"The economy is at a fragile stage in terms of recovery and is contingent on the yen remaining reasonably soft. More recently we have had yen strength.
"We think government bonds will operate in a trading range of yielding 1.6% to 1.9% in the 10 year area of the curve. We are at the top end of that trading range at the moment but we are not sellers because we are underweight already. Most global investment managers are underweight in this market."
Hooker adds that the Bank of Japan is likely to raise interest rates and the group expects them to reach 0.25% by the end of the year from current levels of near zero.
He says another negative for the market is maturing postal savings accounts, as much of this money could shift into domestic and foreign equities, reducing demand for Japanese government bonds, which is where depositor's money has tended to be invested.
Wilde adds that the negative implication many have expected from the maturing of 10 year postal savings accounts has not yet materialised. Around 80% of money which has so far matured from these accounts has been reinvested in postal savings deposits.
Wilde is not anticipating change in government economic policy despite imminent elections and expects continuing high borrowing and government spending to support the economy. He adds the Bank of Japan has been indicating it plans to raise short term interest rates and says the Japanese economy could see growth of between 1% and 2% this year.