KONTAK PERKASA FUTURES – For Japanese fund managers trying to squeeze yield from their nation’s sovereign debt market, 20-year bonds have become a bastion. Now those too are becoming prohibitively expensive.

Tatsuya Higuchi, who manages the flagship sovereign debt fund at Mitsubishi UFJ Kokusai Asset Management Co., said he looks at a gauge of what the 10-year benchmark note would need to yield if purchased a decade hence in order for it to match the return on a 20-year bond. If that gauge falls too far below, the 10-year note’s long-term average yield, the 20-year bond is too expensive, he said.

The irony in the equation is further declines in 20-year JGB yields — driven by something like an expansion of Bank of Japan stimulus — could still make the bonds more attractive, as long as they’re accompanied by an even bigger drop in yields on 10-year securities. Higuchi’s line in the sand for the forward rate lies about halfway between the average yields on the 10-year and five-year notes since the 2008 financial crisis. It’s bumping against that line now, spurring the fund manager to sell a small amount of 20-year debt last week, even as he continues to favor the sector as offering the best balance of yield and liquidity.

‘Very Difficult’

“The expected return has become very low, so it’s actually very difficult to put more money into JGBs now,” Higuchi said in an interview June 8 in Tokyo. “If the Bank of Japan cuts the deposit rate and the 10-year yield starts to trade more negative, then long-term investors can buy the 20-year again, because the forward rate will become more attractive.”

The yield on the 10-year Japanese government bond plunged to a record low of minus 0.165 percent Monday, with the 20-year security slumped to an unprecedented 0.185 percent Friday. Almost 80 percent of JGBs currently have negative yields. BOJ Governor Haruhiko Kuroda will have another opportunity to add to stimulus at a meeting concluding Thursday, a day after the Federal Reserve sets policy.

The 10 year, 10-year forward rate slid to a record 0.52 percent Friday. At the start of the year, it was above 1.8 percent.

Higuchi, at Mitsubishi UFJ Kokusai Asset with about $112 billion, said he hadn’t decided what to do with the proceeds from the sale of 20-year bonds last week.

“Maybe we’ll go to another currency,” he said. “We still like longer tenors of U.S. dollars.”

Source : bloomberg.com