Japan Funds Snap Up China Bonds, Shun Rest of EM Debt

Japanese funds are ramping up China’s bond purchases while shunning most other emerging-market debt as the coronavirus pandemic led to worsening government finances and lower interest rates.

Yield-sensitive Japanese funds bought a net 85.6 billion yen ($822.6 million) worth of Chinese bonds in October, boosting the total this year to 505.7 billion yen, according to the latest data from Japan’s finance ministry. They were net sellers of Philippine, Indonesian and Indian bonds as well as South African and Mexican debt.

“Except for China, where it is seen recovering from the coronavirus crisis quickly, investors’ interest in buying EM debt is clearly fading compared with the past years because yields have become too low,” said Tsutomu Soma, a bond trader at Monex Inc. in Tokyo. “The current yield levels in many emerging countries don’t match the amount of risk involved.”

Japanese bond funds, yield hungry yet conservative, have seen their options shrink this year as central banks everywhere slashed rates with some choosing to retreat to the relative safety of domestic debt. China’s quickening economic recovery and a widening yield gap with developed markets though is proving to be an attractive option.

China’s benchmark 10-year bond yields have risen more than 80 basis points since its low in April to 3.29% on signs of a brisk recovery. Citigroup Inc. forecasts that the nation’s relatively restrained easing, its inclusion in global bond indexes, and yield differential could bring $100 billion of inflows into its debt market annually over the next three years.

“Chinese sovereign bonds could be one of the important investment destinations for Japanese bond investors,” said Toru Nishihama, an economist at Dai-ichi Life Research Institute Inc. in Tokyo. “Investors will be reluctant to invest in other emerging countries where their fiscal conditions are very fragile and unsustainable.”

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