Japanese households buy record 5-year government bonds as rate hike expectations peak

Japanese households have poured record amounts into five-year fixed-rate government bonds, signalling growing expectations that domestic bond yields may be nearing their peak after surging to multi-decade highs last month, Reuters reported.

The sharp rise in Japanese government bond (JGB) yields has made households increasingly sensitive to investment returns, prompting some to shift a portion of the $7 trillion they hold in low-interest bank deposits into retail government bonds, according to Reuters.

Sales of retail JGBs have reached 8.19 trillion yen ($51.77 billion) so far in the current fiscal year, already exceeding the previous full-year record of 7.27 trillion yen set in fiscal 2005.


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Issuance of retail bonds doubled in November from October to 2.03 trillion yen, Finance Ministry data released on Friday showed. Five-year fixed-rate bonds accounted for 65% of the total, while 10-year floating-rate notes made up just 18%.

The growing preference for five-year securities suggests investors are becoming less convinced that interest rates have significant room to rise further. Katsutoshi Inadome, senior strategist at Sumitomo Mitsui Trust Asset Management, indicated that market sentiment was increasingly favouring five-year fixed-rate investments, Reuters reported.

The appeal of five-year bonds has also been reinforced by their widening coupon advantage over 10-year floating-rate notes. The November issue carried a coupon of 2.39% on five-year fixed-rate bonds, compared with 2.05% on 10-year floating-rate securities, representing a premium of 0.34 percentage points. This was the widest gap since July 2007.

December coupons have been set at 2.17% for five-year fixed-rate bonds and 1.85% for 10-year floating-rate notes.

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The shift in household investment preferences comes as the Bank of Japan (BOJ) moves towards further monetary policy tightening. The central bank declared victory in October in its efforts to bring inflation to its 2% target and is widely expected to raise its key interest rate to 1.5% in December.

A Reuters poll of analysts showed expectations of further rate increases, with the BOJ's policy rate projected to eventually reach a terminal level of around 1.75% to 2%.

However, investors appear increasingly confident that yields on five-year bonds are approaching levels that reflect the expected peak in interest rates. Rinto Maruyama, strategist at SMBC Nikko Securities, said investors could find it more advantageous to lock in current yields rather than wait for further increases, Reuters reported.

The record demand for five-year retail JGBs highlights changing household investment behaviour as Japan moves away from its prolonged era of ultra-low interest rates, with investors increasingly seeking to secure attractive returns before the monetary tightening cycle reaches its expected peak.

(Disclaimer: This article is based on inputs from agencies. These do not represent the views of The Economic Times)