BNP Paribas Asset Management has been raising its positions in long-dated Japanese government bonds, attracted by a steep yield curve and signs that domestic demand is returning to the market.

The firm has increased its long-end JGB position from a “very small size” early this year to a “moderate to medium size,” favoring 20- and 30-year bonds, said James McAlevey, head of global aggregate and absolute return.

“What we prefer is the long end of the market because the curve is so steep,” McAlevey said at a briefing in Tokyo last week. The sector has “significantly outperformed other global long ends” recently, providing a source of diversification, he said.

In some flexible strategies, the firm is short two- and five-year JGBs against long positions in 20- and 30-year debt, effectively betting on a flatter yield curve.

The bullish stance comes after superlong JGB yields reached multidecade highs this year amid concerns over inflation, fiscal spending and the Bank of 91AV原创 policy path. Elevated yields have increasingly attracted buyers, with a recent 20-year government bond auction drawing record demand.

Long-dated JGBs offer yields of around 6%-6.5% when hedged into dollars, making them particularly attractive to overseas buyers, according to McAlevey.

Domestic investors, by contrast, have been “relatively absent” from the long end as insurers grappled with impairment issues on low-coupon bonds, he said. But the strength of recent auctions suggests domestic demand is “reemerging into the long end of the JGB curve.”

Japanese insurers have been net buyers of superlong JGBs for the past four months, according to Japan Securities Dealers Association data. Several life insurers have also signaled plans to maintain or increase purchases of domestic bonds in the second half of the fiscal year.

McAlevey said a “relatively constrained fiscal response” from the government would increase his confidence in adding further JGB exposure. He is also watching whether the BOJ can maintain what he sees as a roughly quarterly pace of rate hikes.

The central bank doesn’t necessarily need to raise rates at its next meeting, he said, adding that a December move and continued relatively hawkish communication would be sufficient.

A stronger yen would further support the long end by helping contain headline inflation and easing pressure on the BOJ, McAlevey said. Yen weakness had aggravated pressure on both the bond market and the central bank earlier this year, but he sees that dynamic beginning to reverse.