Now that the Bank of Japan has gone into aggressive easing, there’s this idea that Japanese investors are racing their money out of Japan (and out of Japanese Government Bonds) into foreign assets.
Dan Greenhaus of BTIG writes:
We’ve been fielding many questions from clients related to where Japanese money would flow to. We’ll have a longer note on this later but for now, it’s worth observing that the EEM (iShares Emerging Markets ETF) was up for the third day in a row. We’ve had lots of clients speculate that money is coming out of Japanese bonds and going into Italian bonds or France bonds or WMT, MSFT and other large cap value plays. Maybe so but it’s important to note that the yield on the 10 year JGB is less than it was before the recent announcement. Shorter term yields are higher yes, but not longer term JGBs, at least not yet.
Despite the chatter, it’s not clear that it’s actually happening.
SocGen’s Sebastien Galy emails that it’s not even true that Japanese investors are pouring money into foreign bonds:
Japanese names ended up being net sellers of foreign bonds, rather than buyers as expected. If anyone knows more feel free to share.
There are two possibilities I can see:
1. The market was irrational and blew out of proportion some flows into Europe, Mexico and South Africa. Overall Japanese names were selling bonds because they preferred long dated JGBs and were afraid the JPY would rise.
2. Japanese names were selling agressively UST seeing better value at home as they did many years ago. They did invest abroad but the welling of UST was much bigger.
Trader Mark Dow tweets on the matter:
Speculation any asset going up must b fuelled by Japan outflows is same post hoc ergo propter hoc that led to “Great Rotation” hypothesis.
— Mark Dow (@mark_dow) April 11, 2013
Regardless of what’s actually going on, the reverberations from the Bank of Japan remain the most interesting story right now in global markets.