Tokyo: Sumitomo Mitsui Financial Group Inc, which dumped foreign bonds this year, may increase its Treasury holdings in 2017 as rising US interest rates and the persistence of low yields in Japan make the securities more attractive, its top executive said.

“Investing in US Treasuries represents a chance for us,” said President Koichi Miyata. Sumitomo Mitsui’s portfolio of Treasuries could rise above its holdings of Japanese government bonds, which remain less alluring due to the Bank of Japan’s negative-rate policy, he said in an interview at the banking group’s Tokyo headquarters this month.

Yields on US government bonds have surged to the highest since 2014 after Donald Trump’s election victory spurred speculation that he will increase fiscal spending and fuel inflation. Japanese financial firms are looking abroad for returns as the nation’s central bank persists with its efforts to depress the yield curve while the US Federal Reserve flags the prospect of more rate increases on top of this month’s move.

Having pared bond positions and invested more in equities, “we’re now moving into a world where a certain amount of yield exists again, and that makes Treasuries an increasingly important option,” Miyata said.

It’s unlikely that higher borrowing costs will result in a major disruption to financial markets, Miyata said. He expects the Fed will increase rates two or three times in 2017, while there’s currently no reason for the Bank of Japan to ease monetary policy further.

“I don’t think we’re in an environment for any sudden deepening” of negative rates in Japan given rebounding commodity prices and the weaker yen, he said. Governor Haruhiko Kuroda and his board decided on Tuesday to leave the key rate at minus 0.1 per cent and keep trying to hold 10-year bond yields around zero.

Assess Risks

The global surge in yields has prompted Japan’s financial regulator to assess the potential risks posed to banks by their Treasury holdings, people with knowledge of the matter said this month. The Financial Services Agency is surveying major and regional lenders to ask them how they manage portfolios and whether they plan to hold or sell Treasuries that have unrealised losses, the people said.

Miyata, 63, gave the interview before the company announced a leadership shuffle that will see him become chairman on April 1. Takeshi Kunibe, head of the main banking unit, will replace Miyata, and Makoto Takashima will succeed Kunibe as president of Sumitomo Mitsui Banking Corp.

Sumitomo Mitsui cut its bond portfolio this fiscal year as interest rates around the world declined. Its holdings of Japanese government bonds fell 23 per cent since March to 6.3 trillion yen at the end of September, and its foreign debt dropped 14 per cent to 5.6 trillion yen.

Overtake JGBs

“It’s possible that our foreign bonds could overtake Japanese holdings if interest rates in Japan remain unchanged,” said Miyata. He declined to comment on any specific plans for investment in overseas debt.

Rising US rates may prompt Japanese banks to sell domestic bonds and buy Treasuries, putting upward pressure on JGB yields, according to Takashi Miura, an analyst at Credit Suisse Group AG in Tokyo. Ten-year Treasury yields may climb to about 3 per cent by December 2017 from around 2.5 per cent now, Miura wrote in a note on December 16.

Shares of Japanese banks have rebounded since Trump’s election as the yen weakened and speculation mounted that higher global rates will spur interest income. Sumitomo Mitsui, the nation’s second-largest lender by market value, has gained 29 per cent since Nov. 7. The stock fell 2 per cent Thursday morning in Tokyo and is down 1.4 per cent in 2016.

Earnings Tailwinds

“Continued yen depreciation and a further rise in US interest rates could be tailwinds driving further earnings improvement at Japan’s banks,” Miura said, upgrading his price targets on Sumitomo Mitsui, Mizuho Financial Group Inc and Mitsubishi UFJ Financial Group Inc

Miyata also spoke about prospects for Sumitomo Mitsui to follow larger competitor MUFG and buy back shares, saying it depends on whether global efforts to tighten capital rules will leave room to do so. The Basel Committee on Banking Supervision is working on a proposal due in January that will determine how to assess credit risks — and could lead to more onerous capital requirements for banks.

“We haven’t bought back shares to date because we didn’t know how far regulations would be strengthened,” Miyata said. “Something that was uncertain is going to become clear. It’s like a ghost — it’s only scary until it appears, but once you see it, it’s not going to get any scarier.”