Japanese investors hold French bonds at a far higher share than the market benchmark. Bloomberg estimates that as of July, Japanese investors held about 23 trillion yen in French bonds, or roughly $145 billion, equal to 6.6% of Japan's total holdings of foreign debt securities, making it the most overweight eurozone investment relative to the Bloomberg Global Aggregate Index. The risk comes as the French bond market faces heavy pressure after the government failed to meet its budget deficit targets, compounded by policy gridlock and uncertainty ahead of next year's presidential election. The yield on 10-year French government bonds has now risen to about 5%, the highest since 2002, while French government bonds have returned minus 4.9% since the start of the year, making it the fourth-worst performing bond market in the world, and Japanese investors' holdings of French bonds have already fallen 2.5% from the end of last year. Hideo Shimomura of Fivestar Asset Management warned that the current selling of French bonds may only be the beginning, and that if the European Central Bank takes no action, the yield on 10-year French government bonds could rise to 7%. Meanwhile, the global bond funds at Sumitomo Mitsui DS Asset Management have already sold all of their French bond holdings over concerns about the country's fiscal position.
Heavy selling pressure on French bonds amid fiscal deficit miss and policy gridlock pushes the 10Y yield up toward 5% and potentially 7%, with Japanese investors' $145B holdings at risk of further liquidation.
