Japan's Lowest-Yielding Bonds Lure JPMorgan, Kokusai

The dollar's decline is so steep that even Japan, the nation with the most debt and the lowest interest rates, is attracting global bond funds.

JPMorgan Asset Management, a unit of the third-largest U.S. bank, and Kokusai Asset Management Co., which runs the second- biggest managed debt fund, boosted holdings of Japan's bonds as the yen rose 12 percent against the U.S. currency since the end of June. MFC Global Investment Management (Japan) Ltd., a unit of Canada's largest insurer, predicts 10-year note yields will fall to the lowest since 2005.

Foreign investors bought more Japanese bonds than ever in the first nine months of 2007, increasing holdings by a net 8.3 trillion yen ($75.2 billion), according to Ministry of Finance data. Purchases doubled from the same period of 2006 and were the most since the ministry started keeping data in 2001.

``Yen appreciation is a very strong reason to buy Japanese government bonds,'' said Takeshi Onogi, who helps manage the equivalent of $5.23 billion in debt at MFC, a unit of Toronto- based Manulife Financial Corp. ``It's probably the best investment opportunity to sell the dollar against the yen.''

The benchmark 10-year bond yield has fallen 47 basis points since reaching this year's high on June 13 to 1.515 percent as of 4:55 p.m. Tokyo.

U.S. investors who bought Japanese government bonds at the start of July earned 13 percent including currency gains, according to indexes compiled by Merrill Lynch & Co. That beat returns on the debt of Germany, the U.K. and Australia, even though their 10-year yields are at least double Japan's.

Stronger Yen

Japanese bonds yield the lowest in the 30 biggest government debt markets, according to data compiled by Bloomberg. The price of the 1.7 percent security due in September 2017 rose 0.087 yen today to 101.583 yen.

Fixed-income securities will beat stocks as economic growth slows in the U.S., Onogi said. He predicts Japan's 10-year yield will fall to 1.4 percent in six months, delivering a local- currency return of 1.6 percent. Japan's currency will strengthen beyond 100 per dollar, a gain of 10 percent from 109.87.

Kokusai's $49.2 billion Global Sovereign Open fund has its biggest bet on Japanese government bonds in four years, said Masataka Horii, one of the three managers in Tokyo. Global Sovereign, second in size to Newport Beach, California-based Pacific Investment Management Co.'s Total Return Fund, holds 11 percent of its investments in yen, up from 9 percent on Aug. 31.
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