July 10, 2020 / 4:20 AM / a month ago

REFILE-Japanese scoop up Aussie bonds as big guys lured by high yield

(refiles to change headline)

* Japanese buying in Aussie bonds hit record in May

* Big banks and insurers abandon years of hesitation

* Aussie yields steadily above U.S. peers

* Better COVID situation seen as additional advantage

By Hideyuki Sano

TOKYO, July 10 (Reuters) - Japanese investors are piling into Australian bonds, with big institutional players who have traditionally preferred bigger markets elsewhere stepping in, as Aussie bonds have reclaimed the status of the highest-yield in major developed markets.

Net buying in Australian dollar bonds by Japanese investors hit a record high of 710 billion yen ($6.63 billion) in May, date from Japan’s Finance Ministry showed earlier this week.

Until recent months, Australian bonds had been popular among Japanese retail investors trying to escape zero interest rates at home, but not so much among the country’s biggest banks and life insurers, who had regarded the market as a bit too small for them to trade a large amount.

“We are increasing exposure to the Australian dollar bonds,” said a senior manager of bond investments at a big Japanese bank.

“Japanese bonds aren’t really profitable. We’ve already been buying U.S. and European bonds. When you think about where to go next, emerging markets still look immature. Australia looks more attractive, given its political stability and so on.”

The sudden splurge came as Australian bond yields surpassed U.S. yields, which have plunged following aggressive easing by the Federal Reserve.

Since March, Australia’s 10-year bond yields, now at around 0.90%, have hovered above U.S. bonds, which stood at 0.61%.

The relative attraction grows even bigger when investors take currency hedges, which Japanese institutional investors typically do. Currency hedge transactions cost about 0.5% for both the U.S. and Australian dollar.

That leaves Japanese investors after-hedge yield of 0.4% in Australia but only 0.15% in U.S. bonds.

“Another positive factor is that COVID-19 infections were contained in Australia,” said Hiroshi Yokotani, managing director of fixed income at State Street Global Advisors.

In contrast, the U.S. outbreak is getting worse day by day, which is raising concerns Washington will have to dole out more stimulus to support the economy and sell even more bonds in the future. ($1 = 107.06 yen)

Reporting by Hideyuki Sano; Editing by Kim Coghill

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