Japan’s Pension Funds Pour 18.8 Trillion Yen into JGBs, Most in 17 Years

Japan’s Pension Funds Pour 18.8 Trillion Yen into JGBs, Most in 17 Years

TREE NEWS reports: Japanese investors bought a net 18.8 trillion yen (about $119 billion) of Japanese government bonds (JGBs) in the first half of the fiscal year ending September 30, the largest net purchase since 2009. The surge in demand was underscored by a 20-year JGB auction on Tuesday that drew a bid-to-cover ratio of 5.84, the highest on record and well above the previous 4.01 and the 12-month average of 3.73.

Following the auction, the 20-year yield fell as much as 6 basis points to 3.710%, while the 30-year yield dropped 5 basis points. The strong demand signals that persistently high super-long JGB yields have triggered a large-scale reallocation by domestic institutions.

Pension Rebalancing Drives Trust Banks

Trust banks accounted for nearly half of the net purchases, with commercial banks contributing about one-third. Keisuke Tsuruta, senior fixed-income strategist at Mitsubishi UFJ Morgan Stanley Securities, said trust bank buying likely stems from “rebalancing needs” of public pension funds. Strong equity performance and a weaker yen in the first half created favorable conditions to shift assets from stocks and overseas assets into domestic bonds.

Japan’s public pension funds maintain target allocations between stocks and bonds, and need to adjust holdings when asset prices diverge. A GPIF spokesperson declined to comment on specific investment operations. Ryutaro Kimura, senior bond strategist at UBS BNP Paribas Asset Management, noted that life insurers have also stepped up net buying of super-long bonds since June.

Banks Adjust Foreign Bond Positions

Ministry of Finance data show trust bank trust accounts bought a net 10.1 trillion yen of foreign bonds in the first half, while commercial banks sold a massive 7.4 trillion yen of foreign bonds, the largest reduction since at least 2014. Tsuruta explained that banks expect U.S. and European bonds to come under pressure from rising oil prices, and are shifting to JGBs to earn spreads on deposits. Fukoku Mutual Life Insurance, the first insurer to announce its second-half plan, said it has room to shift more assets from foreign bonds to yen bonds as yields have risen more than expected.

Super-Long Yields Retreat from Highs

Super-long JGB yields have recently approached multi-decade highs. Earlier this month, the 20-year yield climbed to its highest since the mid-1990s, and the 30-year yield hit a record high, driven by a global bond selloff amid Middle East tensions, rising oil prices, and Japan’s fiscal and inflation concerns.

Masahiko Loo, senior fixed-income strategist at State Street Investment Management in Tokyo, said: “JGBs are investable again. The market mindset is shifting from ‘don’t catch a falling knife’ to ‘wait and you’ll be rewarded,’ and this shift is becoming more evident in global bond markets.”

Bloomberg strategist Mark Cranfield called the 20-year auction demand “stunning, arguably the best ever,” and noted it would accelerate curve flattening. He also observed buying from unknown sources, suggesting foreign investors may have joined, showing confidence in the BOJ’s steady rate hike path.

BOJ Meeting Next Week

Despite strong demand, analysts remain cautious about whether yields can sustain a decline. Kimura noted that given recent stock market declines, GPIF rebalancing demand may be limited; and if major banks are allocated large amounts at this auction, they may turn sellers as yields fall. The next major test will be the BOJ policy meeting next week. The market widely expects the central bank to keep rates unchanged, with overnight index swaps pricing only about a 6.2% chance of a hike, but traders will closely watch Governor Kazuo Ueda’s post-meeting press conference for further tightening signals.

Key Takeaways for Investors

• Domestic demand is back: Japanese institutions are repatriating capital as yields become attractive, which could support JGBs and the yen.
• Curve flattening: Strong demand at the long end may flatten the yield curve, impacting bank margins and duration strategies.
• Global spillovers: Higher JGB yields have attracted foreign buyers, potentially influencing global bond flows and currency markets.
• Watch the BOJ: Any hint of faster tightening could reverse the recent yield decline and boost the yen.