Japanese buy up big on Australian bonds

Japanese investors are helping underwrite governments’ massive borrowing spree, buying almost $35bn of government bonds over the year to August.

People visit the Togoshi Ginza shopping street in Tokyo in August. Picture: AFP

Japanese investors are helping underwrite federal and state governments’ massive borrowing spree, buying almost $35bn of government bonds over the year to August, or 13 per cent of total new debt securities.

The Japanese, traditionally big investors in Australia, made their greatest ever investment in Australian government bonds over five months from April, when the coronavirus pandemic saw government borrowing surge. “Yields are low for many sovereigns but relative attractiveness matters, and our yields, about 0.85 per cent for 10 year, are sitting above US treasury yields once again,” said Rob Nicholl, chief executive of the Australian Office of Financial Management.

The yield on Australian 10-year government bonds (in effect the “interest cost” of borrowing), fell below 1 per cent earlier this year, having fallen from a 20-year peak of 6 per cent in 2008. Yields on 10-year US and Japanese government bonds are about 0.75 per cent and 0 per cent, respectively.

“Up to around 13 per cent of our issuance was taken by Japanese investors over the last year, with by far the bulk of those flows happening in the last three months,” Mr Nicholl said.

In the 12 months to August the federal and state governments ­issued $207bn and $61bn in debt, respectively. AOFM, which is part of the Treasury, plans to borrow $240bn this financial year to plug the huge gap between tax revenues and expenses.

The federal budget forecasts gross federal government debt will exceed $1.2 trillion by 2024, and almost $1.75 trillion by 2030.

Robert Thompson, a bond analyst at RBC Capital Markets, said it was “likely” Japan was the single largest buyer of Australian public debt. In August, the most recent month with data available, the Japanese bought more bonds from Australian governments, by value, than from any other government country except Germany, according to RBC Capital Markets.

Around half of Australian government bonds held by foreigners are held in “nominee” accounts by financial institutions, which makes it impossible to see the ultimate owner.

“The Norwegian sovereign wealth fund and the Swiss National Bank for instance are very transparent, but some buyers don’t necessarily want their positions to be known,” Mr Nicholl said.

The Reserve Bank has bought more than $62bn worth of state and federal government bonds since March as part of its quantitative easing program to keep yields on three-year bonds at 0.25 per cent.

“At the really short end of the curve the Reserve Bank has a very strong influence over Australian government securities yields, but longer out, it’s the European Central Bank and the Federal Reserve and other global market conditions (plus of course our issuance plans) that determine yields in our market,” Mr Nicholl said.

The share of federal government debt owned by foreigners had fallen from 60 per cent to about 53 per cent this year as the Reserve Bank purchases increased.

Of the share held domestically, about half is owned by the big four banks and the other half by fund managers.

“It’s possible that China owns more state and federal government debt overall than Japan but it’s impossible to know because they keep their holdings a ­secret,” Mr Thompson said.

“Japanese demand for offshore bonds seems to have receded a bit in September, but remained in net buying territory.”