The dollar's decline is so steep that even Japan, the nation with the most debt and the lowest interest rates, is attracting global bond funds.
JPMorgan Asset Management, a unit of the third-largest U.S. bank, and Kokusai Asset Management Co., which runs the second- biggest managed debt fund, boosted holdings of Japan's bonds as the yen rose 11 percent against the U.S. currency since the end of June. MFC Global Investment Management ( Japan) Ltd., a unit of Canada's largest insurer, predicts 10-year note yields will fall to the lowest since 2005.
Foreign investors bought more Japanese bonds than ever in the first nine months of 2007, increasing holdings by a net 8.3 trillion yen ($75 billion), according to Ministry of Finance data. Purchases doubled from the same period of 2006 and were the most since the ministry started keeping data in 2001.
``Yen appreciation is a very strong reason to buy Japanese government bonds,'' said Takeshi Onogi, who helps manage the equivalent of $5.23 billion in debt at MFC, a unit of Toronto- based Manulife Financial Corp. ``It's probably the best investment opportunity to sell the dollar against the yen.''
The benchmark 10-year bond yield has fallen 46 basis points since reaching this year's high on June 13 to 1.525 percent as of Nov. 9 in Tokyo.
U.S. investors who bought Japanese government bonds at the start of July earned 13 percent including currency gains, according to indexes compiled by Merrill Lynch & Co. That beat returns on the debt of Germany, the U.K. and Australia, even though their 10-year yields are at least double Japan's.
Japanese bonds yield the lowest in the 30 biggest government debt markets, according to data compiled by Bloomberg . The price of the 1.7 percent security due in September 2017 rose 0.561 yen last week to 101.498 yen.
Fixed-income securities will beat stocks as economic growth slows in the U.S., Onogi said. He predicts Japan's 10-year yield will fall to 1.4 percent in six months and remain below 1.5 percent in the next year as the yen strengthens beyond 100 per dollar, from 110.67. A U.S. investor would earn a 13 percent annual return based on those predictions.
Kokusai's $49.2 billion Global Sovereign Open fund has its biggest bet on Japanese government bonds in four years, said Masataka Horii, one of the three managers in Tokyo. Global Sovereign, second in size to Newport Beach, California-based Pacific Investment Management Co.'s Total Return Fund, holds 11 percent of its investments in yen, up from 9 percent on Aug. 31.
Overseas investors owned 38.4 trillion yen of the 662 trillion yen in government bonds outstanding as of June 30, according to the Bank of Japan. Foreign ownership rose to 5.8 percent from 3 percent at the end of 2003. Japan's debt exceeds U.S. marketable government securities by about 30 percent.
The difference in yield between Treasuries and Japanese debt was close to the narrowest in two years after the U.S. Federal Reserve cut its target rate for overnight loans between banks twice in the past two months. The yield advantage for 10- year Treasuries over similar maturity Japanese bonds fell to 2.69 percentage points on Nov. 1 from 3.37 points on June 12.
``The U.S. is starting to cut rates and Japan is in the process of raising rates,'' said Shinji Kunibe, a fund manager in Tokyo at JPMorgan Asset, which oversees $847 billion globally as part of New York-based JPMorgan Chase & Co. ``The dollar will have more downside risks.''
Kunibe pared dollar holdings in September and bought yen, euros and British pounds. The BOJ will raise rates twice in 2008, boosting the yen, he said.
The Fed will cut its target rate by a quarter percentage point to 4.25 percent by the end of March, while the BOJ will increase its benchmark the same amount to 0.75 percent, according to surveys of economists by Bloomberg.
Yasuhiro Otsuka, bond investment general manager in Tokyo at Asahi Mutual Life Insurance Co., Japan's seventh-largest insurer, plans to increase domestic debt holdings to 36 percent of its more than 6 trillion yen in assets from 33 percent.
``The BOJ won't raise rates aggressively, but at the same time the Japanese economy won't fall into recession,'' Otsuka said. ``The dollar is likely to weaken.''