(Bloomberg) -- Foreign investors became net buyers of Japanese government bond futures, putting a stop to their longest selling spree on record, but this is unlikely to signal a turnaround in sentiment.

Global funds purchased a net ¥398 billion ($2.6 billion) of 10-year debt futures in the week through May 3 after dumping them for 12 straight weeks, which was the longest stretch in Japan Exchange Group Inc. data going back to 2014. 

Futures benefited in the latest period after the Bank of Japan left interest rates unchanged on April 26 and maintained bond purchase amounts for its regular operations, which encouraged buying of the contracts on the view that the BOJ won’t rush to raise rates. The yen also sank beyond 160 per dollar the following trading day, the weakest since 1990. 

The drop in bonds Monday after the central bank reduced planned buying serves as a reminder that Japanese debt faces risks including the possibility of tighter monetary policy, foreign exchange volatility and accelerating inflation. Foreign investors’ trading is closely watched because they are major players that accounted for 73% of total transactions of JGB futures last year, exchange data show, and their futures deals also affect the cash bond market. 

 

The latest foreigner futures trading data came right after the BOJ’s decision, and that may have affected the figures, said Shinichiro Kadota, director for research at Barclays Securities Japan Ltd. in Tokyo. “Selling pressure is likely to continue in the bond market,” with investors expecting more rate hikes and a reduction in debt purchases, he said.

The urgency for the BOJ to take action to support the yen has increased to levels seen after the November 2022 prime minister-BOJ governor meeting, Ataru Okumura, a senior rates strategist at SMBC Nikko Securities Inc. in Tokyo, wrote in note. Expectations are likely to increase that the BOJ will take action at its next meeting in June, including a change to its bond buying.

BOJ Governor Kazuo Ueda triggered a tumble in the yen last month after he played down the impact of the weak currency on inflation, but the tone of his remarks on the yen appeared to have changed after a meeting with Prime Minister Fumio Kishida earlier this month. Ueda said on Thursday an abrupt and one-sided weakness of the yen is negative for the nation’s economy. 

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The amount of futures that foreigners bought in the most recent period was a drop in the bucket compared with net sales of ¥7.2 trillion in the preceding 12 weeks through April 26, highlighting bearish sentiment in that market. Ten-year bond futures touched the lowest since January 2014 in November and traded close to that level on Monday.

“The BOJ is becoming hawkish in response to the weak yen,” said Kadota at Barclays. “Short-dated notes are susceptible to rate hike speculation, whereas five-to-10-year debt is exposed to risks of a reduction in bond buying.”

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