Japanese Investment Flows Are Driving Spanish and Italian Bond Yields Lower

Spanish and Italian bond yields have lunged lower in recent months and are on the precipice of sporting yields last seen in 2006. With still raging unemployment and yet to be fixed public finances one could certainly make the case as to why the opposite should be true, but a greater force seems to be taking over at the moment, namely massive Japanese investment flows. In the charts below we show on the right axis (red line) the monthly net Japanese investment in Spanish (chart 1) and Italian (chart 2) bonds and on the left axis (blue line) the respective 10 year government bond yields. Over the last few years there has been a tight correlation between Japanese investment flows into these country's bonds and the prevailing government bond yields. The November flows into Spanish and Italian bonds were the largest since 2006 and 2010, respectively, and aggregate weekly Japanese investment flow data point to a further acceleration in December and so far in January.