Investec Guinness Flight is favouring the 10 and 11 year areas of the yield curve for Japanese gover...
Investec Guinness Flight is favouring the 10 and 11 year areas of the yield curve for Japanese government bonds in the expectation that the domestic recovery will strengthen.
Paul Brain, head of retail fixed income at Investec Guinness Flight, says the group has sold out of five and six year Japanese government bonds and moved into the 10 and 11 year area of the curve. Overall, Investec Guinness Flight is marginally underweight Japanese government bonds. Five year Japanese government bonds are yielding 5% while yields are around 1.2% at the six year end of the curve. Ten year and 11 year bonds are offering a yield of around 1.71%.
Brain says: "We feel that if the economy was to pick up, the first thing to move would be the short rates. The Bank of Japan would raise interest rates and yields would see a pick-up at the shorter end. Inflation rates affect the long end but Japanese inflation is still pretty much under control. We expect a gradual recovery in the economy from around 0.5% growth this year going up to 1.5%. The strategic view for Japanese government bonds is not good, because as the economy recovers domestic investors in the bond market will find a better home for their money."
Joe McKenna, investment manager, fixed interest at Britannic Asset Management, is also underweight Japanese sovereign debt. He has exposure to five and seven year yen issues from the World Bank as a proxy for holding Japanese government bonds, with these yielding around 1% at the five year end and 1.3% to 1.4% at the seven year end.
McKenna says: "I think the economic recovery in Japan is in place but I do not go along with the more bullish forecasts of economic growth. One of the keys to growth in Japan is exports and there is a risk of the US economy slowing down and things could be tough going forward. Another important contributor to growth this year has been the amount of investment spend from Japanese companies which is mostly technology related.
"Where I differ from the bullish commentators is on consumption. I struggle to see where we are going to get a significant recovery in this sector. There is so much corporate restructuring required and much nervousness about employment prospects. This is not conducive to consumption taking off."
McKenna adds that one plus for consumption levels in Japan could be from maturing postal savings accounts the proceeds from some of which will be spent by consumers. However, he likens this to the demutualisation windfalls seen in the UK in recent years. This fuelled some increased consumer spending, but it was a one-off rather than sustained increased spending.
McKenna also believes that Japanese interest rates will remain at 0.2% until the end of the year in the belief that the Bank of Japan is unlikely to risk tightening monetary policy with the recovery still at a relatively fragile stage.
Norwich Union Investment Management, which is to be merged with and renamed Morley Fund Management later this year as part of the merger deal between Norwich Union and CGU, is underweight Japanese government bonds. Alan Bridges, investment manager at the group says that the bonds are overvalued at the long end, with those at the 20 year area of the curve offering yields of 2.1%. The group also has exposure to the one and seven year area of the curve, with one year Japanese government bonds yielding 0.1% and bonds at the seven year end yielding 0.6%
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