Pacific Investment Management Co. (PIMCO) has altered its position on Japanese government bonds (JGBs), moving from an underweight stance to an overall neutral outlook as bond yields hit multi-year highs. Sachin Gupta, a seasoned investor with over 27 years of experience, oversees more than $43 billion in assets at PIMCO. He now identifies value in 30-year bonds, whose yields have reached their highest level since 2006. This shift in strategy comes as traders anticipate further interest rate hikes by the Bank of Japan (BOJ) while central banks in the U.S. and Australia adopt more dovish policies.
“Rates have gone up, but they have essentially aligned with our expectations from some time ago,” Gupta explained during an interview in Singapore on Thursday. “That’s why it makes sense to take profits and reassess the market.”
PIMCO is not alone in reevaluating its position on JGBs. Investment firms such as RBC BlueBay Asset Management and Japan’s National Mutual Insurance Federation of Agricultural Cooperatives are also reexamining the JGB market as borrowing costs surge to their highest levels since the global financial crisis over 15 years ago.
Japan’s inflation is currently among the highest in the Group of Seven (G7) nations, contributing to a sell-off in government bonds. Despite this, even some of the most pessimistic investors are beginning to consider whether now is the right time to buy.
However, risks remain as market volatility and global economic uncertainties persist. Japan’s inflation accelerated more than expected in January due to rising food prices, marking the fastest pace since mid-2023 and putting further pressure on the bond market. BOJ Governor Kazuo Ueda downplayed concerns over the recent surge in 10-year benchmark yields, which some traders may interpret as a signal to sell more bonds.
Investors are closely watching the BOJ’s upcoming policy decision on Wednesday for clues regarding the nation’s future interest rate trajectory. While swaps traders expect rates to stay unchanged this week, they anticipate at least one more quarter-point hike before the end of 2025.
Gupta, who predicted last year that the BOJ was entering the early stages of its rate-hiking cycle, suggests that Japan’s inflation may eventually stabilize closer to the central bank’s 2% target over the long term. As the sell-off has primarily impacted the longer end of the yield curve, Gupta believes it is sensible to allocate funds toward these longer-term bonds.
In addition to JGBs, Gupta is also bullish on gilts and Australian government debt, predicting that these markets will see gains as economic growth slows. “Interest rates in these economies should move lower than where the markets are currently pricing them,” he added, explaining his outlook from a cyclical perspective.
On the other hand, Gupta remains underweight on European rates, particularly following Germany’s historic plan to increase defense and infrastructure spending. “It’s not just about this announcement, but also about potential future fiscal actions,” Gupta said. “We’ve added to our underweight position in Germany and now hold a more tactical underweight in European duration.”
PIMCO’s evolving strategy reflects its ongoing assessment of global economic trends and market conditions, with particular attention on how central bank policies in Japan and Europe will influence bond markets in the coming months.
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