Paris Derangement Syndrome: Japanese Capital Repatriation and the Threat to French OATs

Key Takeaways

• 1.Japanese funds are beginning to repatriate as domestic JGB yields exceed FX-hedged foreign DM yields and long-end term premium stabilizes.
• 2.French sovereign debt (OATs) is exceptionally vulnerable to Japanese disinvestment, representing Japan's largest European bond holding and facing heightened political and fiscal risks.
• 3.The Bank of Japan is seen hiking policy rates once every three months toward a 2% terminal rate, while political pressure mounts for the GPIF pension whale to rebalance into domestic bonds.

Table of Contents

• PARIS DERANGEMENT SYNDROME
• Catching a falling knife.
• Relative stability in the long end is changing the dynamic.
• The Japanese knife is falling slower than that of foreign bonds and fund flows are shifting as result.
• Politics can be the accelerant.
• Looking back to the last major benchmark changes under Abe in 2014,
• A stronger Yen driven by fund repatriation flows has implications that go well beyond Tokyo.
• Japanese investors' historical preference for FX hedging has been a key tailwind for EGBs until 2022.
• EGBs look particularly exposed.
• French OATs are directly on the firing line.
• Market implications are threefold:

Report data

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