End the “zero profit” era! Japanese bond yields are exploding and approaching US bonds, and asset management giants are stealing the new blue ocean of Japanese treasury bonds

The Zhitong Finance App noticed that after paying investors almost zero income over the years, Japanese treasury bonds suddenly had holding value again, and domestic asset management companies are rushing to open up investment channels for ordinary investors.

As the yield on long-term Japanese treasury bonds is now comparable to US treasury bonds and German treasury bonds, Mitsubishi UFJ Asset Management has joined the ranks of Yamato Asset Management and Amova Asset Management to launch an investment trust focused on ultra-long-term treasury bonds.

The trading yield of Japanese 30-year treasury bonds is close to 4%, higher than the yield of about 3.6% of German 30-year treasury bonds, and close to 5.2% of US 30-year treasury bonds.

Although each fund is relatively small (no more than 3 billion yen, or about 18.84 million US dollars), their rapid emergence indicates that the bond market, which has been dominated by the central bank for more than a decade, is undergoing recovery and vitality.

Takayuki Yagi of Mitsubishi UFJ said, “Until recently, you would lose money by holding Japanese treasury bonds,” “but now, if you allocate Japanese treasury bonds and stocks at the same time, you can diversify your investment portfolio like a textbook.”

The fund launched by the Mitsubishi UFJ Asset Management Program in September will focus on investing in low-coupon treasury bonds with a maturity period of 20 years, issued during the Bank of Japan's ultra-loose monetary policy.

As the Bank of Japan promotes long-term policy normalization, the price of Japanese treasury bonds in this sector has recently dropped sharply, boosting yields. However, for buyers who hold it until the expiration date, since 100% of the face value can be recovered at that time, this discounted purchase has brought considerable rewards.

The main way for Japanese households to invest in treasury bonds is traditionally the so-called “individual Japanese treasury bonds,” which have been offered since 2003, and are divided into periods of 3, 5, and 10 years. These securities do not participate in market transactions, and their share of the overall Japanese treasury bond market is still small, although the market is growing rapidly and the Japanese government is working to increase its acceptance in order to diversify the investor base.

Shinichi Sawamura, general manager of SBI Securities's fixed income division, said, “Japan's yield curve is the steepest in major countries, but retail investors haven't had many opportunities to take advantage of this before,” and the company has been selling Japanese treasury bonds for 10 to 40 years since 2021.

The Bank of Japan is reducing Japan's treasury bond holdings

Finding willing buyers of Japanese treasury bonds is critical for the Japanese government. Takafumi Yamawaki, head of Japan interest rate research at J.P. Morgan Securities Japan, said that the Bank of Japan is expected to reduce its Japanese treasury bond holdings by 48 trillion yen this fiscal year and will maintain this pace of contraction.

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

Amova launched an investment trust for 30-year Japanese treasury bonds in November last year, which aims to provide an annualized return of 4%. By the end of June, the fund's assets were 554 million yen, and growth was slower than expected.

Takuya Kanazawa, senior vice president of product development at Amova, said, “Retail investors are concerned that yields may rise further.”

As a result, some asset managers have turned their focus to shorter-term Japanese treasury bonds. The yield on 2-year Japanese Treasury bonds reached a 31-year high of 1.64% on Wednesday, as the market is betting that the Bank of Japan may raise interest rates as early as September.

Daiwa Asset Management added an investment trust in June focusing on Japanese treasury bonds maturing within two years.

“For two-year time deposits, this would be a very competitive product,” said Yasuaki Matsuba, the company's managing executive director. “It's also a good choice for those who can't wait for the 30-year treasury bonds to mature.”