Masahiko Loo is a man with a bond market mission: to explain why a major selloff in Japan’s super long bond market is overstated and why he and his team at SSGA - State Street Global Advisors - aren’t “Sounding the Alarm Bells Just Yet.”
Let me set the stage. Long-term JGB’s with tenures of 30- and 40-years soared to record highs this month, outpacing the selloff of long-term government bonds among Japan’s G3 peers. This has spurred commentary that investors may be be wary of a growing fiscal crisis in Japan, something Masa says is neither starting now nor about to start any time soon.
Some are speculating that this could lead to a major repatriation of capital out of U.S. Treasuries into Japan’s government bonds, something that would put more upward pressure on U.S. bond yields at a time when concerns are growing that the U.S. the bulging budget deficit is not going to be corrected by Congress this year.
Masa, a seasoned global bond market expert and Senior Fixed Income Strategist at SSGA (State Street Global Advisors) in Tokyo is adamant that none of this is warranted by what’s happening in Japan now. First because Japan remains basically “self funded” with household financial assets nearly doube the national debt and 90% of JGB’s held domestically. Also because the gyrations in Japan’s bond market are driven by technical factors in Japan’s insurance industry that are being corrected now, not fiscal deterioration.
And, importantly, if push comes to shove, Japan’s powerful MOF - Ministry of Finance - can tweak their issuance of JGBs, and the Bank of Japan can recalibrate the release of the long-term JGB’s they hold on their balance sheet to stabilize yields along the yield curve and influence global rate dynamics.
So dive in and hear Masa turn the technical into the understandable. Hear him recount what has led up to the situation where the JGB market has gotten to where it is now after the BOJ ended its long era of YCC - Yield Curve Control - and started on the path of policy normalization. And how the current bond market volatility may be another factor that leads the BOJ to hold off on any more rate hikes until at least September of this year.
Global Bond sell-off hits Japan hard 00:02:35.680
Masahiko Loo: If you take a step back right? When you talk about global bonds, including Jgbs, I think year to date. That's a big steepening in the curve right? Or, in other words, larger sell-off in the longer, and of global rates. And this is because of fiscal concern. You know, of of deterioration and and elevated inflation leading to market pricing in higher term premium right? So if you want to take more duration risk. you want to get paid more which makes sense right? So this is what happened in us in Europe, in the Uk, and also in Japan. But one thing that stand out in Japan in the Jgb market is the longer end. Super long end in Jgb. Market. 30 to 40 years has actually sold off almost double what you know. US, and globally, right?
US Vs Japan 00:03:25.610
Japanese 30-year is up at least 70 80 basis points in the Us. It's like 40 to 50 basis points. So you get that. So US 10-year treasury is around 4.5% and 30 year is around 5% In contrast, Japan's 10-Year is around 1.5%; 30-year around 3%.
Japan’s insurers missing in action 00:05:52.390
Just technically, I think it's due to this. A new newly introduced sovereign to sovereignty, too. Regulation for insurance companies in fiscal 2025, which is this year right, which compels lifers to extend duration to fulfill regulation requirement by aligning asset durations with long-term liability profile closely. In other words, you know, it's a regulation that's forcing insurance companies to buy more super long, and bonds to lengthen their duration profile of their portfolio in the past 5 years and these operations are nearly completed, as lifers have lengthened their overall bond, portfolio duration, and this is on the supply demand part, right on the supply side. You know, you need someone to issue the bonds right. So what happened is of all these insurance companies asking for more super long end bonds.
Duration saturation 00:08:04.180
Masahiko Loo: I mean, like in Japan, as you alluded right. I mean the recent 20 year, 40 years bond auction was extremely weak just on the facts that alluded right. There's just not enough demand in the longer end, because of the technical reason. Right? They have. All the life insurance companies have lengthened their duration profile for the past 5 years. and they just don't have more duration needs, and also remember when they lengthen or bought all these super long and bonds in the past 5 years. They bought it at unluckily extremely low levels in terms of yield. And so they are sitting on unrealized loss. But lifers, you know, they have the ability to hold to maturity.
Japan’s deficit is self-funded 00:11:09.400
In Japan, the household financial assets is nearly double. You know the national debt right? And it's around like 2 trillion yen right? And the national debt is around one trillion. Right? So so in in that sense, you know, 90% of Jgbs are actually funded domestically. this is not a funding issue, right? Japan can remain self funded for the next. I don't know, like decades, or you know, centuries of you know, they are double.
Japan debt to GDP ratio is misleading 00:12:27.310
Taking it one step back. When we you mentioned about 250% of debt to Gdp, that number is correct. It's in gross term, right? But then you have to measure debt to GDP in net terms, too. Right in terms of net terms is, you know, Japanese government. They own a lot of cash and assets right? Think about their foreign reserves. They have 1.3 2 trillion dollars of foreign reserves right? And then there's government-owned quasi owned banks and pension assets. Japan has one of the biggest pension funds in the world, right? And it is striking as the net debt to GDP, right in contrast to the gross is actually 140%. The gross number is 250, right? And it's also on the downward trajectory. So it has improved since Covid period. The gross has come down from 250 to 240, and the net number came down from 120, sorry, from 160 to 140.
Japan, a great creditor nation 00:13:24.840
Japan is the one of the largest net credited nation in the world. Right? They own around 3 to 4 trillion dollars of net credit, you know, like they own net assets right in the world, and that assets is actually paying them interest right? So higher interest rates in globally means that they'll get paid more. And you know, in other words, that that brings down the whole debt dynamics.
Bond composition issue is being fixed by MOF 00:15:50.790
And I don't think that's a big, you know, another. I don't expect or speculate that there will be another big lake sell off in Jgb, just because of you know, this policy response is on its way. Minister of Finance has signaled to the market that they will change the bond composition right issuance composition in the next meeting, right. So in June and as early as July, I think there will be policy response, and they will tweak that bond issuance right? And to actually solve that supply and demand mismatch in the market. And remember, 90% of Jgbs is owned domestically and funded domestically, you just, you know, change the the dynamics in the composition to to solve that mismatch.
Massive sales speculation is a bogus concern 00:17:10.710
You know the speculation or sensational speculation in terms of Japan would repatriate every single cent out of foreign assets, and then that would cause a financial market. Amageddon. I don't think so. The reason why is because, you know, if you look under the hood right? Japan is the largest holder of us. Treasury sure, above a trillion dollars. It is structural right. Japan, who owns that one trillion dollars is owned by the you know, the foreign reserves of Japan and also the National Pension funds in Japan. Right? If you look at all this composition is structural, they are. They are structural and strategic holdings that they won't replicate back anytime soon.
BOJ has been put on hold 00:19:14.350
The bond market is not functioning. Well, right? So in June meeting, I don't think Boj will do anything. They'll remain neutral, right? Data dependent, just based on just more uncertainty in the market from the tariffs of what you know, President Trump is causing in globally. Right? So bank of Japan hike is out of the window, for at least you know the next quarter. Maybe right September there will be an Upper House election in Japan in July, so maybe they'll move some sometime in after that, you know, in sometime in September, October. If the data is right, they'll hike another time right? Inflation remains intact in Japan. We see, you know, around like 2% more than 2% inflation in Japan alone in the mid midterm and going back to what they would do to address the you know, functioning of bond market is this, Qt. so bank of Japan is actually they're not selling bonds. But then, you know, they are letting their assets or JGB holdings mature in the natural way. Right? They are not reinvesting anything that's maturing.
Japan dynamics change 00:21:32.300
Fixed income is all about carry. So Japan, you know, 30 year at 3%. I think the life insurance companies would kill for that yield if you were, you know, asking them 5 years ago. Right? It's still the same answer. They would love to own that 30 year bond, 40 year bond at above 3%. But the the fact is they couldn't, because they are sitting on unrealized loss, and you know they don't have enough money to buy right. But then, eventually, you see, all this real money coming in right demand will spread out throughout their years, and even in us, like for yourself, tenure treasury is leading at 4.5%. If you own it to maturity, that compound power will earn you 50% in return, 4.5% a year, right?
MASAHIKO LOO
Masahiko Loo joined SSGA State Street Global advisors in 2024 as Senior FI Strategist covering Fixed Income and Currency. He spearheads strategic growth initiatives for the Fixed Income business across Japan and broader APAC region by delivering investment insights and solutions for investors.
Prior to joining SSGA, Masa had a stint in Wellington Management and managed bond investments as Head of Japan Fixed Income/ Asia-Pacific Portfolio Manager at AllianceBernstein.
Masa is proficient in six languages, including Japanese and Mandarin, and holds a BA in International Liberal Studies from Waseda University.
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