Pension rebalancing ignites demand for Japanese government bonds, with 18.8 trillion yen flooding into the market.

Noting that Japanese investors' purchases of domestic government bonds climbed to the highest level in 17 years in the first half of the fiscal year, with some analysts saying the move reflects pension funds trying to rebalance their portfolios. Net purchases totaled 18.8tn ($119bn) in the six months to September 30, according to data published on Tuesday by the Japan Securities Dealers Association. Trust banks, which are often regarded as agents for pension funds, accounted for almost half of the buying, with banks contributing another third. Pension agents and banks drive JGB purchases Keisuke Tsuruta, senior fixed-income strategist at Mitsubishi UFJ Morgan Stanley Securities in Tokyo, said trust bank bond buying was likely driven by "rebalancing by public pension funds". "The stock market was strong overall in the first half while the yen was weakening, and these conditions prompted a shift from stocks to bonds both at home and abroad." Japan's public pension funds have established allocation ratios for stocks and bonds. When prices of those asset classes change, the funds adjust their holdings to maintain that allocation. An auction of 20-year Japanese government bonds on Tuesday drew the strongest demand on record, offering further evidence of robust demand for domestic debt. Separately, finance ministry data showed trust accounts at trust banks bought 10.1tn of foreign bonds in the first half, while banks sold 7.4tn of such securities, the largest amount since at least 2014. Banks sell foreign bonds to buy as pension agents "The simple logic was that US Treasuries and European bonds would come under pressure on expectations that rising oil prices would push up yields, so banks sold them," said Tsuruta. On the yen, banks were reluctant to buy JGBs because "they still need to earn a certain spread over their deposit base".