Ending the “zero yield” era! Japanese bond yields soar, approaching US Treasury yields; asset management giants rush to tap the new blue ocean of Japanese government bonds

Zhihui Finance APP noted that after years of offering investors virtually zero returns, Japanese government bonds have suddenly regained investment value, and domestic asset management companies are rushing to open investment channels for ordinary investors.

As the yields on long-term Japanese government bonds are now enough to rival those of US Treasuries and German government bonds, Mitsubishi UFJ Asset Management has joined Daiwa Asset Management and Amova Asset Management in launching investment trust funds focused on ultra-long-term government bonds.

The trading yield on Japan’s 30-year government bonds has approached 4%, higher than the roughly 3.6% yield on Germany’s 30-year bonds, nearing the 5.2% level of US 30-year Treasuries.

Although each fund remains relatively small in scale (no more than 3 billion yen, approximately 18.84 million USD), their rapid emergence signals that the bond market, dominated by the central bank for over a decade, is seeing a revival in vitality.

Takayuki Yagi of Mitsubishi UFJ stated, “Until recently, holding Japanese government bonds meant losing money. But now, if you invest in both Japanese government bonds and stocks, you can achieve a textbook example of a diversified portfolio.”

The fund that Mitsubishi UFJ Asset Management plans to launch in September will focus on long-term, low-coupon government bonds with a 20-year maturity, issued during the Bank of Japan’s ultra-loose monetary policy period.

As the Bank of Japan pushes forward with long-term policy normalization, prices of Japanese government bonds in this segment have dropped sharply recently, driving up yields. However, for buyers holding to maturity, the ability to redeem at 100% face value means buying at this discount offers considerable returns.

The main route for Japanese households investing in government bonds has traditionally been the so-called “Japanese Government Bonds for Individuals,” available since 2003 with maturities of 3, 5, and 10 years. These securities are not traded on the market and still represent a relatively small portion of the overall Japanese government bond market, although this segment is growing quickly and the Japanese government is working to increase its acceptance to diversify the investor base.

Shinichi Sawamura, General Manager of SBI Securities’ Fixed Income Division, said, “Japan’s yield curve is the steepest among major countries, but in the past, retail investors have had few opportunities to take advantage of it.” The company has been selling Japanese government bonds with maturities between 10 and 40 years since 2021.

The Bank of Japan is reducing its holdings of Japanese government bonds

Finding willing buyers for Japanese government bonds is crucial for the Japanese government. Takafumi Yamawaki, Head of Japan Rates Research at JPMorgan Securities Japan, stated that the Bank of Japan is expected to reduce its holdings of Japanese government bonds by 48 trillion yen in the current fiscal year and will maintain this pace.

Yamawaki added that, in contrast, the Japanese government is expected to increase issuance of government bonds by 15 trillion yen this year and will continue to raise funds through the debt market to finance large-scale economic stimulus programs and tax cuts.

Amova launched an investment trust focused on 30-year Japanese government bonds last November, targeting an annualized return of 4%. As of the end of June, the fund’s assets stood at 554 million yen, growing more slowly than expected.

Takuya Kanazawa, Senior Vice President of Amova’s Product Development Department, said, “Retail investors are worried yields might rise even further.”

As a result, some asset management companies have shifted their focus to shorter-term Japanese government bonds. With the market betting the Bank of Japan could hike rates as soon as September, the yield on the 2-year Japanese government bond hit a 31-year high of 1.64% on Wednesday.

Daiwa Asset Management introduced a new investment trust in June focusing on bonds maturing within two years.

“This will be a highly competitive product for two-year term deposits,” said Yasuaki Matsuba, Executive Managing Director of the company. “For those who can’t wait 30 years for a government bond to mature, it’s also a good choice.”