July 10 (Reuters) - Japanese bond funds are the worst-performing fixed income category this year due to a perfect storm of a sliding currency and Japan's first rate hiking cycle in years.
BY THE NUMBERS
Japanese bond funds recorded a 13.7% loss in dollar terms in the first half of the year, marking the worst performance globally, followed by Brazilian and Thai bonds, according to LSEG Lipper.
Among the major funds, Vanguard Japan Government Bond Index JPY Acc lost 16.7%, while Nomura Japan Bond index (Wrap) and SMDS Fund Wrap Japan Bond lost about 15% each in that period.
The Lipper data showed investors withdrew a net $467.33 million from yen-denominated bond funds in the quarter ending June 2024, the largest quarterly outflow since the quarter ending March 2023.
WHY IT'S IMPORTANT
This dismal performance is what's keeping investors shy of the market until the risk of further rate hikes ebbs.
CONTEXT
Japan made its first interest rate hike in 17 years in March and the central bank removed caps on 10-year yields and flagged a slowdown in its bond buying programme. Ten-year government bond yields are up 45 basis points at 1.07% for the year so far, potentially putting them on course for the largest calendar-year rise in yield in three decades.
Yields rise when bond prices fall.
KEY QUOTE
"The trends of slowly rising interest rates and declining currency should keep many foreign investors away until there’s some indication that there are changes," said Michael Ashley Schulman, chief investment officer at Running Point Capital Advisors, based in California.
"Japanese government bonds may continue their decline for a while longer, at least until the Fed actually lowers rates, there's an economic crisis, or there is a major support signal or policy change from the Bank of Japan."
(Reporting by Gaurav Dogra and Patturaja Murugaboopathy in Bengaluru; Editing by Tom Westbrook and Jacqueline Wong)
