Is Archegos the next Bear Stearns
China’s recent purchase of Japanese government bonds rose to its highest level in more than three years as the country more than tripled its holdings between April and July this year from the previous year..
According to the Japanese edition Nikkei, citing data from Japan’s Treasury and Central Bank, during these three months of 2020, China bought 1.46 trillion yen ($ 13.8 billion) of medium and long-term JGB (Japanese government bonds). This is 3.6 times more than in the same period last year.
In comparison, according to available data, the US increased its purchases by only 30% over the same period. Meanwhile, according to Nikkei, Europe has sold JGB worth 3 trillion yen.
JGB returns close to zero, making them an unattractive investment option.
But analysts polled by CNBC believe there may be other reasons why China would want to buy these bonds..
«One of the oddities of the current environment is that JGBs are no longer overtly unattractive fixed income securities, depending on the currency in which you finance the purchase.», – said Ross hutchison (Ross Hutchison), Global Fixed Income Investment Director at Aberdeen Standard Investments.
For example, China could actually make more on investment by buying 30-year-old JGBs in Japanese yen and exchanging its foreign exchange positions back for US dollars, Hutchison said. According to him, due to this, the yield may grow by another 0.56%. Long-term bonds usually have higher yields as investors have to take higher risks in order to hold securities for an extended period of time.
The practice of a currency swap is that two parties exchange an equivalent amount of money in different currencies among themselves, for example, to protect themselves from further exposure to foreign exchange risk.
«Many reserve managers buy JGB and then exchange or hedge the currency back into dollars for an additional base premium», – reported David Nowakowski (David Nowakowski) Senior Multi Strategist and macroeconomic assets of Aviva Investors.
It is also possible that China is trying to manage the appreciation of the yuan as the Chinese currency surged against the Japanese yen in June, Hutchison said. Selling RMB to buy Yen-denominated JGBs could help curb this rise to some extent.
The yuan has also surged against the US dollar this year as the Chinese economy picks up steam again following the coronavirus pandemic..
Another factor is that compared to global peers, Japanese government bonds do not have the lowest yields, Novakowski said..
«Even with zero yields – in fact, JGB yields are slightly below 0% – the Japanese bond market is more attractive than many other countries’ bonds, with Sweden, Switzerland and the major eurozone countries showing deeply negative yields.», – he said.
Global Treasury yields have declined this year as investors turned to safe government bonds amid the worsening coronavirus pandemic. As prices rise, yields fall as they move inversely to each other..