* Key investor base for French debt stays aloof in recent
* Political risks remain despite Macron win in first round
* Some Japanese investors await clarity on French
* Changing Japanese ownership of OATs tmsnrt.rs/2pje6NR
By Abhinav Ramnarayan and Hideyuki Sano
LONDON/TOKYO, April 28 Japanese investors,
traditionally among France's most loyal lenders, are not yet
convinced that French political risks have faded and are staying
away from the country's bonds.
Some even exploited a rally in French government bonds this
week to sell down their positions further, one London-based
Investors piled into French government bonds after centrist
Emmanuel Macron took the lead over far-right leader Marine Le
Pen in the first round of presidential elections on Sunday.
But this did not seem to enough to lure in Japanese
investors, who held 12 percent of French debt at the end of last
"It is a bit difficult to buy French bonds now. There will
be some twists and turns and we have to watch certain political
events, said Naoki Akiyama, general manager for investment
planning at Nippon Life, Japan's biggest private life insurer.
The London trader, who works closely with Japanese clients,
said they had not bought bonds since the first round of voting.
"There's been no demand (from Japanese investors), there's
actually been selling as they took profit on the knee-jerk rally
on Monday," he said, preferring to remain anonymous as he is not
authorised to speak about his clients.
"Japanese investors were part of the crowd that were
switching from OATs into Bunds - a mix of European, Asian and
Japanese investors," he said, referring to French and German
At the end of 2016, Japanese investors held 27 trillion yen
(223 billion euros, $243 billion at current exchange rates) of
French government bonds, or about 12 percent of the market,
In February this year, though, they dumped a record 1.58
trillion yen of French bonds on concerns that Le Pen would win
the presidential election.
Even though polls suggest Macron will become president in a
May 7 run-off, they are yet to come back.
Japanese investors, including the big life insurers have
bought billions of euros worth of foreign bonds in recent years
to counteract low yields in the domestic market.
French debt yields more than German benchmarks but is still
among the euro zone's highest-rated paper.
French 10-year yields hit a 2017 high of 1.16 percent in
February, and the yield gap with Germany - seen as a measure of
political risk in France - peaked at 82.6 basis points.
This dipped to as low as 40 bps after the result -- a cue
for some Japanese investors to cut their French holdings
Hiroko Iwaki, senior foreign bond strategist at Mizuho
securities, said Japanese investors may be waiting for the next
chance to enter the market, such as if yields rise in
anticipation of tighter monetary policy.
"They have cash to put to work but they seem reluctant to
make moves now. They should be ready to buy if certain hurdles
are cleared," he said.
The French-German spread move has since widened, standing at
46 bps on Friday, possibly a sign of profit taking.
Akira Takei, a fund manager at Asset Management One, added:
"Considering we still have the second round vote and (June's)
parliamentary elections, I don't see any reason to buy the euro
The reluctance on the part of these investors comes at a
time when market participants are worried that Asian investors
are withdrawing from the euro zone government bond market on
IMF data shows the share of the euro in worldwide foreign
currency reserves has been steadily declining since March 2010.
Three primary dealers who work with many euro zone public
sector borrowers including France agreed that there have been no
signs of Japanese investors returning to the French government
bond market this week.
Tuesday's 8 billion euro bond sale by euro zone bailout fund
European Financial Stability Facility - a key proxy for French
debt - failed to attract Japanese demand, according to one of
the bankers who ran that deal.
"You may get a better idea of Japanese demand if France does
that 30-year after the second round of presidential elections,"
the banker said.
France has been monitoring the market for a potential
30-year bond sale via syndication, a method by which borrowers
appoint banks to sell bonds directly to investors.
The primary dealers believe the deal could come after the
second round if Macron wins through.
A second trader who works with Japanese clients said he
believes Japanese investors will return to the French government
bond market eventually.
"Japanese investors generally have a lot of confidence in
France, not just French debt. Normal service will be resumed,
and they will be reinvesting in French debt and building their
holdings back up over time," he said.
($1 = 111.2300 yen)
(1 euro = 121.2296 yen)
(Additional reporting by Jamie McGeever; Editing by Toby