Japanese Investors Flee Overseas Bonds Amid Rising Yields

The global bond market has been experiencing a rout, with Japanese investors starting to pull back from their overseas holdings. The benchmark Japanese bond yield broke through a three-decade-old barrier of 3% on Tuesday, making domestic bonds more attractive compared to foreign ones.

This change in sentiment is significant because Japan has been one of the biggest owners of US Treasuries and a major buyer of sovereign debt worldwide. According to official data, Japanese investors have sold a net ¥3 trillion ($18.7 billion) in overseas debt through August 22, which is the largest year-to-date outflow since bonds tanked in 2022.

'I know it first-hand from talking to Japanese investors,' said Michael Weidner, co-head of global fixed income at Lazard Asset Management. 'They've underinvested in yen securities for probably 25 years. Now it's become more attractive and they are reallocating.'

The Japanese Government Pension Investment Fund (GPIF), the world's largest pension fund with $1.8 trillion in assets, has not yet made any adjustments to its portfolio, but other institutional funds are reassessing opportunities at home. A survey by J.P. Morgan Asset Management showed that corporate Japanese pension funds plan to boost domestic bond holdings, which could further reduce their overseas debt holdings.

The implications of this shift in investor behavior are significant, as Japan is a major player in global bond markets. The relative attractiveness of domestic bonds compared to foreign ones has improved on a currency-hedged basis, potentially encouraging a shift from overseas assets back into Japanese fixed income.