BNP Paribas Asset Management Increases Positions in Ultra-Long JGBs, Betting on Yield Curve Flattening
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What exactly are they buying — and how?
BNP Paribas AM started the year with a "very small" ultra-long JGB position and has since built it to "medium size," focused on 20- and 30-year bonds.
In some flexible strategies the firm is simultaneously shorting 2- and 5-year JGBs against its 20- and 30-year longs. This means → it is not a simple long-duration bet but a wager that the spread between short and long ends will narrow — a curve-flattener.
In plain terms = short-end rates are unlikely to fall much further, but long-end yields look stretched and have room to compress. The trade profits from that gap closing.
Why enter now?
Ultra-long JGB yields hit multi-decade highs this year on fears of inflation, fiscal expansion, and BOJ rate hikes.
Yet James McAlevey, head of global aggregate and absolute return, argues that high yields themselves are drawing buyers — a recent 20-year auction attracted record demand.
Hedged back to USD, ultra-long JGBs offer roughly 6%–6.5%. This means → for offshore investors, the return rivals US high-yield credit but carries far less credit risk.
Is domestic money coming back?
Japanese insurers had been "relatively absent" from the long end after mark-to-market losses on low-coupon bonds.
Data from the Japan Securities Dealers Association show insurers have been net buyers of ultra-long JGBs for four consecutive months, and several life insurers have signaled they will maintain or increase domestic bond purchases in the second half of the fiscal year.
This reflects a "return to the long end of the curve" — the most intense phase of long-end selling may be over.
What conditions would trigger further additions?
McAlevey names two watchpoints: whether the government can maintain "relatively restrained fiscal responses," and whether the BOJ can hold a pace of roughly one hike per quarter.
He sees no need for the BOJ to act at its next meeting — a December hike with relatively hawkish communication would suffice.
A stronger yen would help by damping headline inflation, easing pressure on the BOJ, and thus supporting long-end bonds. In plain terms = yen up → inflation cools → BOJ less rushed to hike → long-end prices safer.
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