One of Asia’s best-performing bond funds says the yen is the “main vehicle” investors should target when the last anchor to the world of rock-bottom interest rates lifts off.
(Bloomberg) — One of Asia’s best-performing bond funds says the yen is the “main vehicle” investors should target when the last anchor to the world of rock-bottom interest rates lifts off.
“If you’re talking about pivots, this is the mother of all pivots,” when the Bank of Japan decides to tweak monetary policy, said Omar Slim, a money manager at PineBridge Investments. “The way that the market will respond to this, the obvious one will be potential appreciation of the yen.”
The yen has climbed more than 11% from its October nadir amid government intervention, hopes for a slowing of US rate hikes and speculation over the possibility of a shift from the BOJ some time next year. The risks of such a pivot became more entrenched on Wednesday following a report officials were weighing the possibility of a policy review in 2023 — a precursor of policy changes in the past.
Authorities look to be defending the yen around 145 per dollar and “it seems that the sweet spot for them, at least at this point seems to be the 120, 130 kind of level,” said Slim.
The Japanese currency traded around the 135.50 level on Thursday.
Investors have begun to scenario plan the capitulation of the last dove among major central banks, which has the potential to unleash a wrecking ball across everything from stocks to bonds. And while some have speculated that a BOJ lift-off could trigger higher bond yields everywhere, Slim doesn’t see a huge spillover to Treasuries.
“The story around the Fed is so strong that it’s going to overwhelm what other safe haven bond markets do,” he said.
Slim, who helps manage PineBridge’s Asia Pacific Investment Grade Bond Fund that beat 92% of peers over the past five years, joins Fidelity International and T. Rowe Price in favoring the yen after it was bludgeoned to a three-decade low of 151.95 per dollar this year.
The Year’s Big Yen Short Is Poised for a Dramatic U-Turn in 2023
Bond Bear
The Singapore-based fund manager sees the BOJ potentially adjusting policy through different mechanisms: altering the amount it spends buying government debt and exchange-traded funds to stimulate the economy, and allowing the cap on benchmark yields to drift.
Policymakers will have to manage the process “without causing a lot of damage to pension plans, to banks’ balance sheets, to insurance balance sheets and so on,” he said.
Slim is negative on Japanese bonds whose yields have been kept artificially low for years to keep borrowing costs at rock bottom.
“It would be very courageous for anyone here to be constructive on JGBs,” he said.
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