A $121 Billion Japan Fund Is Buying Spanish Bonds Despite Election Risks

(Bloomberg) -- As Spain hurtles toward its third election in four years, Mitsubishi UFJ Kokusai Asset Management Co. is buying the nation's bonds despite the looming political uncertainty.

Wider spreads and better economic fundamentals than some of the euro area's other major economies mean Spanish bonds have the potential to outperform, according to Tatsuya Higuchi, executive chief fund manager at Mitsubishi UFJ in Tokyo. The debt made up 12.3 percent of the money manager's flagship Global Sovereign Open fund at the end of January, the highest single-country holding after U.S. Treasuries.

"We don't think that political risk has heightened tremendously as Spain has been having minority governments," Higuchi, whose firm oversees the equivalent of $121 billion, said in an interview last week. "Yields are falling everywhere, so you can't invest in German bonds at present levels, but there is still merit in investing in Spanish bonds given the spread.”

Japanese funds are increasingly scouting for opportunities abroad after yields at home dropped below zero at the end of 2018. As high dollar-hedging costs eat into returns from Treasuries, Europe has been a destination of choice for buyers from the Asian nation, with Spain's superior economic growth and low levels of volatility offering a compelling mix.

Hedged returns from Spanish debt for Japanese investors have exceeded those on U.S. and German bonds over the past year. While the spread offered by Spain's 10-year bonds over similar-maturity bunds tightened as traders digested the Feb. 15 announcement for snap elections, the gap is still over 100 basis points.

Once the election is out of the way, investor focus will turn to Spain's “strong economic conditions,” Higuchi said. The new government is expected to continue pursuing a policy that will encourage productivity to help the overall economy, he said.

Mitsubishi UFJ returned to Spanish bonds after a seven-year hiatus in March last year, when S&P Global Ratings lifted the nation's sovereign rating, and has since been increasing holdings of the debt steadily.

That said, Japanese investors in general too seem to be optimistic about Spain's prospects. Funds from the Asian nation were net buyers of long-term Spanish debt -- including corporate bonds -- in 10 of 12 months last year, according to latest data from the Ministry of Finance.
Spain will continue to grow faster than the euro-area average and the vote won't have a meaningful effect on growth, the nation's Economy Minister Nadia Calvino said last week. The economy is forecast to grow by 2.1 percent this year, according to the European Commission. That compares with predictions of of 1.1 percent for Germany and 1.3 percent for the euro area as a whole.

Below are some other comments Higuchi made during the interview:

• Difficult for global yields to advance given the Federal Reserve's dovish pivot and receding prospects of rate hikes by other major central banks
• Fund remains keen on holding Treasuries as the U.S. economy is strong. U.S. bonds more attractive than European bonds, with the exception of Spanish and Irish debt
• Less enthusiastic about buying French bonds given the Yellow Vest crisis, but they may offer attractive yields after hedging currency exposures for other investors provided that they have high liquidity

--With assistance from Stephen Spratt.

To contact the reporters on this story: Chikafumi Hodo in Tokyo at chodo@bloomberg.net;Saburo Funabiki in Tokyo at sfunabiki@bloomberg.net

To contact the editors responsible for this story: Tan Hwee Ann at hatan@bloomberg.net, Shikhar Balwani, Nicholas Reynolds

©2019 Bloomberg L.P.