The U.S. election campaign risk is causing investors in Japan to reduce U.S. Treasury holdings.
The Federal Reserve had promised to lower interest rates for longer-term falling yields on US Treasury securities.
Many investors in Japan have opted for Spanish bonds because high dollar hedging costs are affecting profits.
The Japanese bond fund is reducing its US Treasury holdings in the run-up to the upcoming US presidential election.
Earlier, the Federal Reserve had promised to keep interest rates low for a longer period of time, which led to falling yields, but the presidential election in November gives Japanese investors another reason to avoid treasury holdings.
Managing Chief Executive Chief Fund Manager of Mitsubishi UFJ Kokusai Asset Management Co Tatsuya Higuchi, said
“The markets may become unstable as the political noise gets louder as the presidential election approaches,” said Tatsuya Higuchi.
He also added that the company had reduced its 388.6 billion yen ($3.7 billion) bond fund treasury holdings while at the same time benefiting the sovereign debt of Spain and Australia.
The reduction in the MUFJ’s bond fund comes at a time when there has been a massive supply on demand for U.S. government debt, which is estimated to have exceeded $1 trillion in net bond sales by December.
Spanish bonds benefited
The MUFJ bond, whose total assets amount to $121 billion, bought bonds from Spain despite the threat of political unrest in connection with the upcoming presidential elections.
Higuchi says, however, that better economic fundamentals than some of the major economies in the eurozone mean that Spanish bonds have the potential to perform well.
His confidence in Spanish bonds is such that Spain’s debt at the end of January accounted for up to 12.3 percent of the MUFJ’s flagship Global Sovereign Open Fund, making it the highest single-country holding of the fund after US Treasury securities.
Many investors in Japan have expressed enthusiasm for Spanish bonds. As the high cost of hedging the dollar affects government bond yields, the eurozone has become attractive to Japanese funds.
It is important to note that Spain in particular is superior due to this higher economic growth and lower liquidity, as since last year the hedged assets from Spanish funds have exceeded the funds from the United States and Germany bonds for Japanese investors.
The Chief Executive Chief Fund Manager of MUFJ believes that the upcoming presidential elections will lead Japanese investors to Spain.
However, Mitsubishi UFJ Kokusai’s Global Sovereign Open fund reduced its treasury holdings to 35.4 percent as of August 31, the lowest level since October 2014, and 39.2 percent in July, Higuchi said:
“No matter who is elected, he will focus on fiscal policy to restore the economy ruined by the coronavirus, and it may take some time before we can confirm the key agenda from the candidates.
Add Australian debt
The Japanese bond fund increased its holdings of Australian government bonds from 0.3 percent in January to 2.8 percent. Higuchi said that Australian bonds offer better yields and that it is much easier to increase exposure to the Central Bank of Australia’s yield targeting policy.
Higuchi added: “Australian government bonds offer better yields:
“Demand for natural resources could pick up and Australia could benefit from the recovery in China and other parts of Asia.
With the US presidential election due to start in a few months, Japanese investors will look for more ways to protect their bonds and stocks.