Bank of Japan’s hawkish stance seen boosting demand for US corporate bonds

INTEREST rate hikes from the Bank of Japan (BOJ) should help cut currency protection costs for Japanese investors, spurring their appetite for US investment-grade corporate bonds, according to Bank of America (BOA).

The BOJ raised its key policy rate last month to the highest level since 2008 amid projections for higher inflation, fuelling expectations for further rate hikes and a flatter yield curve for Japanese government bonds.

That ought to lower foreign exchange hedging costs and improve the relative value of US high-grade bonds, stimulating Japanese demand for them, BOA strategists including Yuri Seliger wrote in a note on Tuesday (Feb 18).

“The hedging cost is largely the difference in policy rates between the US and Japan,” wrote the strategists. “As a result, more BOJ hikes would further bring down the hedging cost.”

Hedging costs for Japanese investors having largely fallen since October, with the US Federal Reserve having lowered its benchmark interest rate for the first time in more than four years in September. Three-month US dollar-hedging costs based on forward contracts for yen-based investors earlier this month reached their lowest level since September 2022.

Both robust foreign demand for high-yielding US corporate bonds and falling hedging costs are drawing companies to Japan, with the likes of Invesco seeking to grow their base of Japanese bond buyers. The average yield on a high-grade US corporate bond was 5.31 per cent as at Tuesday, according to Bloomberg index data. BLOOMBERG

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