With Japan's 10-year government bond yield nearly doubling to about 3% in Prime Minister Sanae Takaichi's first year in office, asset managers are shifting toward buying bonds. It is a sign that the "buy stocks, sell bonds" trade that dominated her first year is being unwound.
Fund managers at major firms including J.P. Morgan Asset Management and Mitsubishi UFJ Asset Management are reassessing the so-called "Takaichi trade" and moving their short positions in Japanese government bonds to neutral, Bloomberg reported on the 14th. Recent JGB auctions have pushed yields to attractive entry levels, while U.S. pressure for fiscal tightening is constraining Takaichi's expansionary stance. Open interest in JGB futures has fallen to about 186,000 contracts from a September peak of roughly 211,000.
"When you look at long-dated Japanese government bonds, value is clearly emerging," said Sylvia Sheng, lead portfolio manager for multi-asset solutions at J.P. Morgan Asset Management. Sheng closed her short position in 10-year JGBs in September and moved to neutral.
Asset managers had built short positions in bonds on expectations that yields would keep climbing, reflecting expansionary fiscal policy, rising bond issuance and signs that underlying inflation was approaching 2%. Concerns that the Bank of Japan could fall behind on inflation because Takaichi was reluctant to tighten monetary policy, along with expectations that she would fund her economic plans through borrowing, also encouraged selling. After debt concerns reignited in January and sent shockwaves through global bond markets, Takaichi's expansionary stance and plans for state support of strategic industries drove Japanese stocks to record highs. According to Bloomberg Intelligence data, a portfolio that bought the Topix, Japan's benchmark stock index, and sold JGBs returned more than 30% over the past year, outperforming the Topix itself.
On top of rising yields globally, JGBs fell out of favor with investors as the current government's fiscal expansion heightened volatility. Super-long maturities, the most sensitive to the fiscal outlook, bore the brunt of the instability, with yields on 30-year and 40-year bonds surging to historic highs amid continued selling.
The Japanese government responded by using policy tools to encourage buying of JGBs. Finance Minister Satsuki Katayama in July floated the idea of having the Government Pension Investment Fund buy more Japanese bonds. Discussions about including government bonds in the NISA tax-free small investment program are also seen raising expectations for inflows of retail money.
"Investors can now earn 3% by doing virtually nothing, just by parking their money in bonds," said Kiyoshi Ishigane, chief fund manager at Mitsubishi UFJ Asset Management. Ishigane has been shifting his underweight position in government bonds toward neutral and selling Japanese stocks as long-term yields climbed above 2.5%.
