LIVE MARKETS-Euro/yen shorts on Japan investors' OAT sales overdone, say UBS

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EURO/YEN SHORTS ON JAPAN INVESTORS' OAT SALES OVERDONE, SAY UBS

Like a loose tooth, the question of whether Japanese investors will sell their large holdings of French government bonds has been one of markets' favourite themes to niggle at over the past few years.

Clearly, the answer has implications for various assets, most obviously, for French debt and the euro/yen exchange rate.

But UBS forex analysts have a note out on Wednesday arguing that some of the angst needs to be toned down for now, partly because, they say Japanese investors have sold a lot already.

Alvise Marino, an FX strategist at the bank, has gone through the numbers and says since mid-2022, Japanese investors have mostly been net sellers of euro area long-term debt assets, and have sold a total of 7.8 trillion yen ($49.23 billion) worth of French long-term debt in that time.

Flow data is reasonably good, stock data is less up to date, but this selling flow has obviously had an effect on the overall holdings.

Marino says within the euro area, French debt assets still represent a large share of Japanese investments, but as of end 2025, OATs make up 7.3% of Japanese investors' total holdings, a historical low and down from a peak of 11.1% in 2019.

"Concerns about Japanese selling of French debt are therefore valid but not particularly timely, as exposure has already fallen considerably," he says.

While that's not a tailwind for OATs, it at least reduces one potential headwind.

As for euro/yen, Marino says options markets are primed for selling of French assets to drive euro/yen lower. He says of all euro pairs, it is euro/yen where risk reversal skews are most bid for puts over calls, once adjusted for the outright level of implied vol.

He thinks this is overdone, first, because of less potential Japanese selling of French assets, but secondly because Japanese investors' recent French debt sales were recycled into other foreign assets rather than brought home.

"This adds to our scepticism about repatriation flows driving yen strength," he said.

($1 = 158.4400 yen)

(Alun John)

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