Japan's Steep Yield Curve Lures Overseas Investors with 'Reverse Carry' Trade Opportunity

A potential 'reverse carry' trade opportunity has emerged in Japan due to the country's steep yield curve. According to Rong Ren Goh, fixed income portfolio manager at Eastspring Investments, this means overseas investors can now buy ultra-long Japanese government bonds and hedge their yen exposure back into dollars or another developed-market currency.

This strategy could give investors higher yields versus comparable bonds in their home markets. For example, the 30-year Japanese government bond above 4% gives an FX-hedged yield 100 to 200 basis points higher than the base currency equivalent when swapped in any developed-market currency, including the dollar.

Goh expects the reverse carry trade to gain broader appeal as investors become more confident of a stabilisation in Japanese bond prices following a selloff that started in 2022. Eastspring has already begun building exposure through high-quality corporate and Samurai bonds to enhance carry further.