If Japan is any lesson, French bond yields set to tumble

mardi 2 juin 2015 09h54

GRAPHIC: French, JGB yields: link.reuters.com/nah84w

By Hideyuki Sano TOKYO, June 2 (Reuters) - Institutional investors including hedge funds are scrutinising the past performance of Japanese government bonds for clues on where French sovereign debt is headed following one of its biggest routs in years.

Ten-year French yields rose as high as 1.08 percent last month as some investors reckoned the European Central Bank's monetary stimulus would work and the euro zone was slowly making its way out of deflation. After the ECB said in January that it would buy 60 billion euros ($66 billion) of largely sovereign bonds every month under its quantitative easing programme, yields had initially fallen to a record low of 0.33 percent.

Some hedge funds say the performance bears an uncanny resemblance to JGBs' reaction to the Bank of Japan's massive monetary easing in early 2013. At that time, 10-year JGB yields tumbled to a record low of 0.32 percent before similarly rebounding to a peak of 1 percent.

The swings in French bonds are so similar that some hedge funds have created charts plotting European yields over those of JGBs in 2013, said Tetsuro Ii, president of Tokyo-based Commons Asset Management. Benchmark German 10-year yields have also moved in a similar fashion since late April, though French interest rates are closer to JGB yields partly as France is nearer to Japan in debt ratings than Germany.

The 10-year JGB yield has now fallen back and hit a record low below 0.2 percent in January. If the resemblance to JGBs were to persist, euro zone yields will gradually slip back under the weight of the ECB's buying. "There's no change in (euro zone) monetary policy. This will be an excellent place to buy European bonds," said Masahiro Ichikawa, managing director of Tokyo-based Capital Partners Securities. ($1 = 0.9111 euros) (Editing by Ryan Woo)