Total cash bond trading volume (excluding derivatives) among domestic institutional fixed-income investors in Japan declined by 9% over the past year to 212 trillion. However, among international investors based in Japan, total cash bond trading volume increased by 6% to $621.1 billion. These are key findings of a summer 2002 study by Greenwich Associates.
Total domestic fixed-income assets under management declined by roughly 15% over the past year to 206 trillion. Three-quarters of total reported domestic holdings are now in government securities (including agencies), while 20% is in investment-grade credit bonds and the remainder in asset- and mortgage-backed securities.
“Japanese institutions – even regional banks who have traditional focused exclusively on the yen bond markets – are reaching beyond their borders for returns,” says Greenwich Associates consultant Tim Sangston.
Total international fixed-income assets under management also rose about 6% to $418 billion. Of total reported international holdings, nearly 60% are in government bonds, 35% is in investment-grade credit bonds (including agencies), and the remainder in asset- and mortgage-backed securities, from 67% one year ago.
Government bond yields globally have offered limited return potential for some time, particularly in Japan. As a result, Japanese investors who have long focused their fixed-income investments in G7 government securities have turned increasingly to corporate bonds (including agencies) and to some degree to credit products.
“We are seeing strong evidence that Japanese accounts are expanding outside the realm of their traditional products, investing to enhance the yield, or return, on their investments,” Tim Sangston says. The proportion of domestic volume in G7 government bonds is now just 78%, down from about 85% one year ago, compared with 72% (down from 77%) among international investors.
Among domestic investors, the remaining volume is comprised of investment-grade credit bonds (12%), agencies (7%), and asset- and mortgage-backed securities (1%). International fixed-income investors have turned more strongly to agency securities (18%), followed by mortgage-backed securities (4%), investment-grade credit bonds (3%), and asset-backed securities (2%).
More than half of Japanese fixed-income investors conduct a formal review of their fixed-income dealer list, with 38% conducting them semi-annually as opposed to 24% who do so annually and 29% who do so quarterly.
Portfolio managers and traders are most frequently involved in this review process, but at around 15% of institutions with an established review process, the CIO is also involved. The primary criteria used in evaluating dealers are quality of sales coverage, research capabilities, and breadth of fixed-income product.
“Those accounts not conducting formal reviews should consider it, as it is a valuable tool in leveraging business into service quality,” says consultant Dev Clifford. “The majority of accounts in the region (65-70%) are not directly rewarding their dealers for research at a time when there is pressure on dealers to rationalize research budgets. It is important for investors to signal, directly or indirectly, that research is important to them, especially in the current environment.”
Although for a number of years adoption of electronic media for fixed-income trading and research access appeared to be steadily growing, this year’s data reveals emerging resistance. While online research and informational activity is well-established among Japanese fixed-income investors, online trading has reached a plateau with fewer than 10% of domestic investors and less than 5% of international investors reporting they trade any fixed-income product online.
“What’s even less promising for the future of online bond trading in Japan is that 81% of domestic investors and 95% of international investors in Japan report they are not even considering electronic trading for their fixed-income business,” Dev Clifford adds.
From June to August, 2002, Greenwich Associates conducted 259 interviews with senior investment professionals in Japan investing in domestic fixed income and 148 interviews with senior investment professionals in Japan investing in international fixed income. Institutions where interviews were conducted included banks (regional banks, Shinkin banks, agricultural banks, trust banks, and others), investment companies, and insurance companies. Interview topics included trading practices, market trend analysis, and investor compensation.