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Yokohama Bank Weighs Japan Bond Comeback With More Rate Hikes to Come

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(Bloomberg) -- One of Japan’s biggest regional banks is keen to resume buying the nation’s bonds as interest rates creep higher, adding to a growing line of financial institutions that are weighing a return to local debt after years of investing abroad. 

“When yields rise, Japanese government bonds will definitely become the mainstay of our portfolio,” said Tomoki Arai, head of markets at Bank of Yokohama Ltd. “We would like to make an entry with the 10-year yield at around 1.1%.” 

Ten-year yields are now about 1%, after the Bank of Japan abandoned a policy of keeping borrowing costs near zero earlier this year as inflation takes hold in the world’s fourth-largest economy. They extended gains this week after Donald Trump’s US election win triggered bond selling. 

Bank of Yokohama, based in the port city near Tokyo, is a unit of Concordia Financial Group Inc., Japan’s second-biggest regional bank by assets. Yen bonds used to make up most of its more than ¥2 trillion ($13 billion) portfolio before the central bank launched massive monetary easing in 2013. The ensuing decline in domestic yields prompted the lender and its rivals to shift to foreign bonds and other assets to secure returns.

“It became like this because yields on yen bonds disappeared,” Arai said in an interview. 

Now the situation is reversing after the Bank of Japan started raising rates in March and peers abroad later began lowering them. The BOJ also scrapped its policy of controlling bond yields, a move that has made domestic debt more attractive to lenders from Tokyo-based giant Mitsubishi UFJ Financial Group Inc. to San-in Godo Bank Ltd. in one of the nation’s least-populated prefectures. 

Arai expects Governor Kazuo Ueda and his policy board to raise rates from the current 0.25% as soon as December, as they examine the impact of renewed weakness in the yen on inflation and the economy.  

“I have been expecting the next BOJ hike to come in March or May next year, but depending on the currency market situation, it could come in either December or January,” Arai said, adding that the central bank is likely to spend six to 12 months after that to lift the policy rate to 1%. 

At the same time, Bank of Yokohama is bracing for the possibility that the BOJ’s policy normalization gets derailed by risks such as the failure of the US to engineer a so-called soft landing for the world’s biggest economy. 

“We could miss a chance to buy by waiting for yields to rise,” Arai said. The bank might buy five-year or shorter-tenor notes to a certain degree, he added.

Like many of its rivals, Bank of Yokohama suffered losses when the US Federal Reserve began aggressively raising rates in 2022. It had to sell its foreign bond holdings at a loss after dollar-funding costs surged above what it earned from the securities. 

The bank has since replaced foreign notes with floating-rate products such as collateralized loan obligations, which now stand at about ¥180 billion. Arai said the lender has become somewhat cautious on CLOs after spreads on the products made up of bundled leveraged loans tightened this year due to their popularity with Japanese banks and other investors.

He said the bank has room to increase exposure to equities given that it has relatively small cross-shareholdings. Its equity investments are mostly made up of Japan and US index funds. 

Hired Staff

Arai said Bank of Yokohama’s market division hired five mid-career professionals during the fiscal first half that ended in September, including from a foreign bank and an insurer. 

It’s rare for a Japanese regional bank to poach that many people in such a short period. Traditionally, local lenders are made up of lifetime employees who join fresh out of college. 

Arai said that even at regional lenders, talent mobility is on the rise in the markets business. The bank is actively hiring partly to make up for those who left for asset management firms and other financial institutions. 

“But higher mobility also means there are probably more talented people” looking to change jobs, he said.   

The bank could hire a veteran in the future, partly to mentor younger staff, Arai said, echoing a wish expressed by Concordia’s President Tatsuya Kataoka. 

“Those who know the markets of the 1980s and early 90s, who were in the dealing room when rates were rising, are becoming fewer,” Kataoka said in an interview last year.

Arai concurred.  

“As yields are coming back, there aren’t many who have experienced an operation centered on yen bonds,” he said. “It would be reassuring to have someone like that.” 

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