EuropeanJun 23 2015

Asian buyers may stem bond rout

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Asian buyers may stem bond rout

A sell-off in European bonds sparked by a Greek exit from the eurozone (Grexit) could prompt a wave of foreign buyers, particularly from Asia, according to economists.

Asian investors have been shifting money into European bond markets recently and if a Grexit causes a correction they could pick up their pace of investment, economists have said.

Bonds across the eurozone, particularly in peripheral countries such as Italy and Spain, have sold off in recent months as fears mount over a Greek default and the subsequent fallout.

The yield – which moves inversely to price – on a 10-year Spanish government bond has doubled in the past three months, rising from 1.15 per cent to 2.33 per cent.

The sell-off hasn’t been confined to the periphery, with German 10-year yields rising from 0.07 per cent to almost 1 per cent in a matter of weeks.

But economists have sought to allay fears over an uncontrollable sell-off, with the prediction that foreign investors would be on hand to snap up the bonds if prices fell further.

Hermes Investment Management chief economist Neil Williams said: “If there is a healthy fast correction in the European bond market then Asian investors could look at Europe more closely.”

The top-four Japanese insurers, which control around $1trn (£630bn) in aggregate, had traditionally invested the bulk of their funds in Japanese government bonds, but aggressive quantitative easing in the country has caused them to look elsewhere.

Following the recent sell-off, peripheral bond yields are now much higher than they were when the European Central Bank (ECB) began its ¤1trn (£718bn) bond-buying programme, which was expected to keep yields low.

Flows into European bonds had been stemmed as the region became overvalued, with negative yields close to becoming the new normal, but the sell-off has made the region more attractive.

Russell Investments strategist Wouter Sturkenboom said: “Japanese investors used to be heavily invested in Europe a few years ago, but they took that money out and put it into Japanese government bonds.

“However, they have been buying more [European bonds] now that French and German bonds are yielding more than their local government bonds.”

But Mr Sturkenboom said these investors would keep their investable universe limited to French and German bonds and steer clear of more “adventurous bonds” offered by the peripheral European countries.

A backstop of demand from Asian investors could be pivotal for European debt.

Standard Life Investments chief economist Jeremy Lawson has predicted that a Grexit could prompt a “wave of uncertainty and volatility” throughout the region.

But he added: “Once it becomes clearer that a Grexit is just going to cause short-term noise and not long-term volatility, then I think it could be viewed as a buying opportunity.”

Many UK bond fund managers have also pinpointed any volatility around a Greek default and exit as an opportunity to buy.

They have said the backdrop of the ECB’s extensive quantitative easing programme and the gradual economic recovery in Europe should support bond prices in the medium to long term.