The Bank of Japan headquarters in Tokyo on January 24, 2025. Photographer: Akio Kon/Bloomberg.
Interest rate hikes from the Bank of Japan (BOJ) should help cut currency protection costs for Japanese investors, spurring their appetite for U.S. investment-grade corporate bonds, according to Bank of America Corp.
The BOJ raised its key policy rate last month to the highest level since 2008 amid projections for higher inflation, fueling expectations for further rate hikes and a flatter yield curve for Japanese government bonds. That ought to lower foreign exchange (FX) hedging costs and improve the relative value of U.S. high-grade bonds, stimulating Japanese demand for them, BofA strategists including Yuri Seliger wrote in a note on Tuesday.
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“The hedging cost is largely the difference in policy rates between the U.S. and Japan,” wrote the strategists. “As a result, more BOJ hikes would further bring down the hedging cost.”
Hedging costs for Japanese investors have largely fallen since October, since the Federal Reserve began in September lowering its benchmark interest rate for the first time in more than four years. Earlier this month, three-month dollar-hedging costs based on forward contracts for yen-based investors reached their lowest level since September 2022.
Both robust foreign demand for high-yielding U.S. corporate bonds and falling hedging costs are drawing companies to Japan, with the likes of Invesco Ltd. seeking to grow their base of Japanese bond buyers. The average yield on a high-grade U.S. corporate bond was 5.31 percent as of Tuesday, according to Bloomberg index data.
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