JAPAN - Despite concerns over funding levels and the need to increase investment returns, Japanese institutional investors are increasing their activity in government bonds, according to research published by Greenwich Associates.
Contrary to expectations and previous trading behaviour, Japanese government bonds’ (JGB) trading share increased from 77% to 80% and is deemed by the consultancy as a “surprising shift”.
According to the 2005 Japanese Fixed-Income Research Study, trades in higher yielding fixed income products, such as agency securities, asset backed and mortgage backed securities, popular in 2004, saw a downturn. Credit bonds survived the culture change.
Greenwich Associates consultant Dev Clifford said the move back into JGBs is also causing Japanese investors to alter their behaviour elsewhere.
“Last year our research revealed that more institutions were directly awarding fixed income dealers who provided them with exceptional research - a practice indicative of an increasing institutional focus on credit bonds and structured products. This came to an abrupt end in 2005.”
Clifford stated this shift was raised eyebrows, particularly as economic recovery in the country has taken a hold.
“Interest rates have no where to go but up, and the environment for fixed income investors could become much more difficult in the near future,” Clifford warned.
The report’s other key findings include:
In 2005 Japanese investors stepped up cash bond trading activity over the past year as growth in total trading volume outpaced increases in fixed-income assets.
Volume in credit derivative trades dropped by about 20% while interest rate derivatives fell even further.
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