Japanese investors pulled back from foreign bonds for a third straight week through October 3, selling foreign debt worth a net 503.6 billion yen ($3.19 billion), according to data from the Ministry of Finance. This marked the smallest weekly total in the past three weeks, as surging US Treasury yields and rising returns at home sapped appetite for overseas debt. The outflows have been significant, with Japanese investors making net foreign bond sales of about 5.08 trillion yen so far this year, the most since 2022. The trend reflects a significant market shift as Japanese investors divest from foreign debt amid climbing domestic yields.
Japan's 10-year government bond yield reached a 30-year high of 3.122% earlier this week, while the US 10-year Treasury yield hit a 24-1/2-year high of 5.3645% on Wednesday amid concerns over inflation and government debt. The strong auction performance suggests that higher yields are finally attracting enough buyers to show up, as noted by Market Briefs. The narrowing yield advantage of overseas debt, compounded by the cost of hedging foreign-currency exposure, has made Japanese government bonds increasingly competitive with US and European securities. As Guillermo Felices, global investment strategist for fixed income at PGIM, noted, "It's becoming a lot more attractive for Japanese investors."
The strong auction performance indicates that higher yields are finally attracting enough buyers to show up, as noted by Market Briefs. Japanese long-term bonds attracted net foreign inflows of 585.7 billion yen, ending a two-week streak of outflows as overseas investors returned to the market. Meanwhile, foreigners also bought a net 2.19 trillion yen of Japanese stocks, snapping a three-week run of outflows. On Tuesday, Sumitomo Mitsui DS Asset Management said it had recently sold some French government bonds in favour of German and Japanese debt, as France's borrowing costs climbed to their highest since the 2000s. The domestic setup has turned more bond-friendly, though bigger forces remain in play, including US Treasuries coming under renewed pressure, sending longer maturities to fresh multi-decade highs.
Attention now shifts to Thursday's 30-year JGB auction for another read on appetite further out the curve, according to Market Briefs. The bond market movement reflects investor assessment of Prime Minister Takaichi's expansionary fiscal policies and their potential impact on Japan's public finances. The outflows could support the yen and pressure bond markets where Japan has been a major buyer for decades. The record-high yields across multiple maturities indicate growing market concerns about the sustainability of Japan's fiscal position, particularly given the upcoming 30-year bond auction results. The strong auction performance suggests that current yield levels may be attracting sufficient buyer interest to support continued government borrowing demands.
