(Bloomberg) -- The Bank of Japan's attempts to steepen the nation's yield curve may set in motion fund flows that end up flattening the curve in Europe.
Higher yields on Japan's 30-year bonds, a benchmark for comparison for the nation's funds when weighing overseas purchases, is changing the European investment proposition.
What used to be attractive for Japanese funds, such as the five-to-10-year notes of Germany and France, is “ripe for sale,” according to Giles Gale, head of European rates strategy at NatWest Markets Plc. That will contribute to “further flattening pressures,” Gale wrote in a note.
The BOJ on Monday paved the way for deep purchase cuts across most of the yield curve in October, indicating it may even stop buying debt that matures in more than 25 years.
That doesn't mean Japanese funds are all rushing home where 30-year yields still hover under 0.4%. Spanish and Italian debt, on a currency-hedged basis, still offer a pick-up for Japanese funds.
Read: How Japanese funds use currency markets to profit from overseas bond purchases
Given the expectations, NatWest expects the flattening in European bond curves to continue, and for Spanish and Italian bonds to outperform northern European peers, as Japanese money “continues to flood in,” Gale wrote.
To contact the reporter on this story: Stephen Spratt in Hong Kong at sspratt3@bloomberg.net
To contact the editors responsible for this story: Tan Hwee Ann at hatan@bloomberg.net, Brett Miller
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