(Bloomberg) -- Mitsubishi UFJ Financial Group Inc. will consider shifting more of its $488 billion securities portfolio into Japanese government bonds when yields reach 1.2%, as it expects the central bank to continue raising interest rates.
Japan’s biggest lender will weigh “full-scale investment” in domestic sovereign notes when 10-year yields and overnight index swaps reach that level, said Hiroyuki Seki, head of MUFG’s markets business. The bank could move ¥5 trillion to ¥10 trillion ($35 billion to $70 billion) from its central bank reserves into bonds, Seki said. Ten-year JGBs now yield a little under 0.9%.
Traders worldwide are watching for signs that Japan’s financial institutions will pile back into local debt now that the Bank of Japan has started raising rates and paring its bond holdings. As inflation takes hold, MUFG expects Governor Kazuo Ueda to make steady progress in his policy normalization efforts, with the next rate increase likely this year at the earliest.
“As stock and currency markets are regaining stability, we see the possibility of a policy rate hike to 0.5% as early as December or January next year,” Seki said in an interview.
Seki, who oversees MUFG’s ¥70 trillion securities portfolio, correctly predicted the end of its negative-rate policy in March and subsequent market-roiling hike in July.
Seki said the BOJ is likely to consider raising the benchmark rate toward a “neutral” interest rate, estimated to be at least 1%. The market hasn’t fully priced in the central bank’s trajectory, given that the policy rates haven’t exceeded 0.5% this century, he added.
“There remains more room for rates to rise from where they are now,” Seki said.
Japan’s 10-year government bond yield was at 0.87% late Thursday. It reached 1.1% in July but has since dropped despite the Bank of Japan raising interest rates on July 31, dragged down by falling US Treasury yields.
One way that Japanese banks like MUFG may be able to allay fears among global investors of a mass repatriation of foreign assets is for the firms to use their yen reserves held at the BOJ to fund purchases. If Japanese financial institutions start bringing money home, that could disrupt already-volatile currency markets as well as weigh on US Treasuries and other foreign bonds.
Seki added that the average duration of MUFG’s JGB holdings, excluding those held to maturity, may be extended to around 3 years, from 1.1 years currently.
Energy Trading
Seki, who also heads MUFG’s sales and trading business, said the bank will tap growth opportunities in Japan’s power trading market.
Last month, the company said it will start providing trade execution and clearing services for Japan power futures, making it the first major bank to join a domestic exchange that’s been overshadowed by an overseas rival.
“In order to promote clean energy investment, it’s critical to have predictability in power prices,” Seki said. “But the futures market isn’t functioning sufficiently to curb price fluctuation risks.”
The need for price hedging is expected to surge in Japan’s power market, which was liberalized in 2016, as the country’s increasing renewable energy demand and seasonal fluctuations spur volatility and arbitrage opportunities.
But most of Japanese power futures trading takes place at the European Energy Exchange, where many of the overseas participants, from oil majors to financial institutions, are members. Domestic bourse operator Tokyo Commodity Exchange Inc. has struggled to grow its trading volume and match the scale.
Using Tocom would allow Japanese firms to minimize currency risk and higher interest rates that trading at EEX exposes them to, Seki said. The bank has about 20 employees assigned to power futures trade execution and clearing services, he added.
Seki said MUFG also intends to be involved in the spot power market. The bank has decided to acquire a 49% stake in a subsidiary of enechain, a startup that handles physical trades, to facilitate “sleeve” trading connecting participants in spot and futures markets.
--With assistance from Shoko Oda.
(Updates with bond yields in the eighth paragraph)
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