Abe’s European spring break: Japan stimulus sends euro zone yields to record lows

April 5, 2013

It wasn’t just the Nikkei. Euro zone government bonds rallied following Japan’s announcement of a massive new monetary stimulus. That sent yields on the debt of several euro zone countries to record lows on bets that Japanese investors might be switching out of Japanese government bonds into euro zone paper, or might soon do so.

The Bank of Japan on Thursday announced extraordinary stimulus steps to revive the world’s third-largest economy, vowing to inject about $1.4 trillion into the financial system in less than two years in a dose of shock therapy to end two decades of deflation.

Austrian, Dutch, French and Belgian borrowing costs over ten years fell to record lows as investors piled into euro zone debt offering a pick-up over Germany. The bond rally was led by 10- and 30-year maturities after the BOJ said it would double its holdings of long-term government bonds.

According to one trader:

There is no question that Asian demand for semi-core is quite strong and I think, in light of yesterday’s BOJ move, the expectation is that that’s going to continue.

Philip Tyson, strategist at ICAP, told Reuters Insider there had been talk of life insurance companies switching out of Japanese bonds overnight in search of yield, potentially into European debt.

Bond dealers cited early central bank buying of euro zone debt, including from Asia, but few had seen large Japanese institutional buyers in the market first hand. Some said investors may be trying to get ahead of the trend  by loading up on euro zone bonds in anticipation that a relative play between the markets will materialize.

Andy Chaytor, strategist at Nomura, said the extent of the rally, particularly in the 30-year, is “very indicative of flows driving it. You don’t normally get those kind of moves just on a marking basis.”

We expect that the BOJ’s decision to buy up JGBs, especially longer-dated JGBs, means that Japanese real money may be tempted to look abroad for duration requirements to a greater extent than before.

He said the market was already pricing that in but could go much further still:

At a minimum, and not inconsequentially, the news may reassure investors in European government bonds that large-scale selling by Japanese investors is now less likely, improving the risk-reward for European-based investors to buy.

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