What's bad for JGBs is good for EGBs
JGBs had a very bad session with the 10-year yield touching 0.70% for the first time since February 25. Much of the weakness was prompted by Japanese flow data finally showing that Japanese investors were net buyers of foreign bonds.
After six weeks of sales they turned buyers in the week ending May 3 to the tune of a net ¥309.9bn and ¥204.4bn in the prior week.
With BoJ QE still on autopilot these are early days and it is likely that the JGB market will eventually settle down especially as the BoJ is buying some 70% of newly issued JGBs.
But our focus here is not on JGBs but on the impact that such buying will have on foreign bond markets and risk markets in general.
Remember the day that followed the April 4 BoJ meeting when Kuroda delivered his bazooka we saw a massive move lower on core/semi-core bonds?
Well, that was a move based on expectations and the flow data are now showing the potential that we have been seeing actual demand. This might go some way to explaining why peripheral debt has been rallying at the same time as core markets – with 10-year Bunds in particular seeing a move in yields below 1.20%.
The flow data from Japan are likely to remain volatile but supports the argument of staying long core, semi-core and peripheral debt (except for Slovenia) in the current environment.
We remain especially constructive on GGBs and Irish debt but also the front-end of the core/semi-core markets with a probable ECB deposit rate cut likely to promote more in the way of risk seeking down the yield curves.