Money Managers Use Weaker Yen to Fund Asian Bets

Dec 18, 2013

Money Managers Use Weaker Yen to Fund Asian Bets

By Fiona Law

The weakening Japanese yen is gaining allure among top money managers as the funding currency of choice for investing in Asian assets. Shorter-term Asian bonds are among their investment picks, because they are less vulnerable to a rise in interest rates that would result as the U.S. Federal Reserve scales back its easy money policy. In Asia, bonds denominated in Korean won and Chinese yuan are favored because of the countries’ strong domestic economies and firmer currencies.The yen has fallen 16% against the dollar so far this year, and investors have already made lucrative returns from Japan’s determined stance to weaken its currency to fuel economic growth. Meanwhile, the dollar is expected to continue rising as the U.S. economy recovers and the Fed dials back its bond-buying program.

“Historically there is actually mixed evidence of dollar strength in the early phase of [U.S.] policy tightening but we do expect the U.S. dollar to do well in 2014. So rather than funding potential Asian currency positions via dollar, we currently partially fund from yen,” said Joel Kim, head of Asia Pacific fixed income at BlackRock Inc.BLK +0.33%, the world’s biggest money manager with $4.096 trillion in assets under management.

In a typical yen-funded trade, investors borrow in yen and take a short position in it, and invest the money in other assets with higher return.

Asian bonds remain in favor, with bond giant Pimco still seeing structural support for Asian debt.

“We continue to see a multiyear shift by global investors to diversify their assets from developed markets into nontraditional allocations like emerging markets,” Ramin Toloui, global co-head of the emerging markets portfolio management at the Newport Beach-based firm, told The Wall Street Journal.

Mr. Toloui said Asia’s growth is stabilizing “but not stellar”, though the external environment will likely offer support to the region. Pimco’s preference for shorter-duration bonds is anchored on the premise that the Fed is on track to scale back its $85 billion-a-month bond buying spree. In Pimco’s view, the yen is “an attractive funding currency to own global assets.”

Bonds with long duration are more sensitive to the movement in interest rates than short-dated debt.

Mr. Kim at BlackRock said in emailed comments to The Wall Street Journal that “staying shorter in duration can buffer bond portfolios from capital losses due to rising local yields.”

Reflecting the current view among money managers, Singapore-based Temasek Holdings Pte. Ltd.’s fully owned Fullerton Fund Management has set up a new Asia-focused short duration fixed-income fund, which has $30 million in assets and aims to invest in bonds with three-year maturities or below.

BlackRock’s Mr. Kim doesn’t expect a massive selloff in Asian bonds to be repeated next year because the prospect of the Fed tapering has largely been priced in. However, currencies like the Indonesian rupiah and Thai baht, which are vulnerable to current-account deficits and reliant on commodities, are still assets best avoided, he said. BlackRock overweights Korean won and offshore yuan bonds.