Contrarian Bet on Japanese Long-Term Bonds! Azimut Fixed Income Head: Traders Overestimate Inflation, Yield Surge Presents Prime Opportunity for Positioning

According to Zhitong Finance APP, although Japanese government bonds are seen as high-risk assets by the market, fund managers at Azimut Group view them as one of the most attractive opportunities globally for fixed-income investors at present.

Nicolo Bocchin, Global Head of Fixed Income at the Dubai headquarters of this $180 billion asset management company, is making a bold bet that the Bank of Japan will not hike rates aggressively. He believes traders are overestimating Japan's inflation outlook.

“I am a buyer of long-term Japanese government bonds and am very optimistic about their prospects,” Bocchin said in an interview on Monday. “The long end of the yield curve is very attractive.”

This view runs counter to the most mainstream consensus in the market. With expectations of persistent inflation, a growing fiscal deficit, and the central bank's gradual exit from the bond market fueling ongoing increases in funding costs, investors have pushed Japanese long-term bond yields to their highest levels in decades.

Last week, Japan's 40-year government bond yield briefly climbed to 4.01%, approaching the historical record of about 4.355% set in May. Amid a bond sell-off, the yen also weakened, hovering near a forty-year low of 164 yen per US dollar.

Bocchin pointed out that these risk factors are already fully reflected in current Japanese bond prices. Even though Japan is experiencing inflation after decades of deflation, the annual inflation rate is still below 2%, and Japanese policymakers have repeatedly emphasized that preventing a return to deflation remains their top priority.

“You really have to question why the market insists on pushing Japan toward rate hikes,” Bocchin said. “For highly leveraged countries, inflation is actually a blessing.”

Azimut also expects domestic policies in Japan to support the market, including the planned expansion of tax-advantaged savings plans such as the Nippon Individual Savings Account (NISA) to include Japanese government bonds. Earlier this month, Japanese Finance Minister Mitsuki Katayama also called on large domestic pension funds, including the $1.81 trillion Government Pension Investment Fund, to increase allocations to domestic assets.