May 14, 2019 / 3:39 AM / 2 months ago

UPDATE 1-Japan investors bought record amount of French bonds in March

* Japanese buy net 3.184 trln yen of French bonds in March

* In same month, Japanese were net sellers of US and German bonds

* Fed’s halt of rate hikes seen boosting demand for French bonds (Adds details, background)

By Shinichi Saoshiro

TOKYO, May 14 (Reuters) - Japanese investors bought a record amount of French bonds in March, data showed on Tuesday, as low domestic rates and the Federal Reserve’s dovish tilt fuelled demand for assets with relatively high yields and solid credit ratings.

Japan’s finance ministry said investors purchased a net 3.184 trillion yen ($29.17 billion) of French bonds in March. That compared with February’s net 988.3 billion yen and was the biggest amount for any month since the ministry began reporting such data in January 2014.

Faced with domestic long-term interest rates anchored below zero under the Bank of Japan’s easy policy, Japanese investors have been striking out overseas in search of better returns.

But their preference for French debt has stood out. Japanese investors sold a net 445.5 billion yen of U.S. bonds and offloaded a net 185 billion yen of German debt in March, according to the data.

“Japanese investors buying French bonds is nothing new. But their buying was particularly strong in March, when the prospect of higher U.S. rates was dashed” by the Fed, said Yuji Yamazaki, Japan rates strategist at SMBC Nikko Securities.

The Fed said after its March policy meeting that it might not increase rates this year. Three months earlier, it said two hikes would be appropriate in 2019.

REDUCED YIELDS

Among European government bonds, French debt “continues to offer higher yields than German bunds. They may not yield as much as Italian and Spanish bonds but they offer better credit ratings,” Yamazaki said.

After the Fed signaled a halt to rate hikes in March, the 10-year U.S. Treasury yield declined to a 15-month low of 2.34 percent, dragging down other government bond yields in turn.

The 10-year Japanese government bond yield slipped to minus 0.100 percent late in March, its lowest since August 2016, while its German counterpart sank to a 2-1/2-year low of minus 0.094 percent.

The French 10-year yield also declined in March, but managed to stay above zero. As of Monday, it yielded 0.328 percent.

U.S. Treasuries offer higher yields compared to other government debt. But the high cost of currency hedging, the expense investors pay for protection against foreign exchange fluctuations, has stifled Japanese demand for dollar-denominated assets.

$1 = 109.15 yen Reporting by the Tokyo markets team; Editing by Richard Borsuk

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