Japanese investors lost $60 billion in Treasuries as soaring currency hedging costs make European debt opportunities more attractive
Something big is happening in Japan. Investors have traditionally flocked to the Japanese yen when the economic landscape turns choppy, gripped by the belief that the currency will hold its value even amid global market volatility. However, with war-torn Ukraine, inflation reaching historic highs in developed countries, and stock markets falling sharply, investors’ appetite for a safe-haven yen may be coming to an end.
The Japanese currency fell to a 20-year low against the US dollar last week, in unison with the world‘s other 10 most traded currencies. As the US Fed prepares to raise borrowing costs in the face of 40-year high inflation, Japan’s central bank is caught between a predicament of stagnant growth and low inflation. But, even though the US dollar index has risen significantly, the greenback still isn’t attractive enough for some Treasury buyers, even as confidence in their home currency falters.
Japanese institutional investors have traditionally embarked on purchases of US debt, becoming one of the biggest holders of Treasuries outside US markets. However, that trend is no more, because as data cited by Bloomberg from BMO Capital Markets suggests, one of the largest holders of Treasuries has lost nearly $60 billion in the past three months alone. with even greater divestment potential.
What is driving Japan’s sudden distaste for US debt? For starters, the currency gap between the Asian country and America has been on a divergent stretch lately, with the yen crashing to the lowest since the early 2000s, while US markets brace for a tightening. aggressive Fed policy. That sent currency hedging costs skyrocketing, making even higher nominal US yields less attractive, especially among large life insurers.
As Fed Chairman Jerome Powell prepares to embark on a battle against inflation that could see interest rates rise by 50 basis points at each of the FOMC policy meetings, the Bank of Japan is stuck in an endless quantitative easing rout. the subsequent weakening of the yen makes buying Treasuries unattractive even if Japanese bond yields remain firmly in place at around 0.25%.
Although the US 10-year yielded around 2.98% at the time of writing, institutional investors paying a premium to protest the volatility of the yen-dollar exchange rate saw their yields plummet. just above 1% as hedging costs rise. at 1.55%, the highest since the start of 2020. “Hedging costs are the problem for investing in US Treasuries,” said Nissay Asset Management Corp’s fixed income managing director Eiichiro Miura, quoted by Bloomberg.
Although events such as hawkish Fed tightening cycles and market volatility have turned Japanese investors away from Treasuries, the current economic landscape is very different. Indeed, a great deal of uncertainty surrounds the trajectory of inflationary pressures in the United States, which could prolong Japan’s absence from the Treasury market. At the same time, the availability of later offshore bonds could become more attractive, especially as euro hedging costs are relatively lower.
“Over the next six months or so, it is better to invest in Europe than in the United States, as hedging costs are likely to be low,” said Tatsuya Higuchi, executive fund manager of Mitsubishi UFJ Kokusai Asset Management Co. .. “Among euro bonds, Spain, Italy or France look attractive given the spreads.” Generally, buyers of Japanese bonds have focused on the middle part of the yield curve, such as 5- and 10-year bonds, while pension funds and life insurers prefer 30-year bonds. However, given the sudden shift to hawkish monetary policy by the US central bank, some Japanese investors have been forced to rethink their holdings of foreign debt.
“Japanese investors will wait for some stabilization in long-term yields before they sense a buying opportunity,” MUFG’s head of macro strategy George Goncalves told Bloomberg. “If the 10-year moves in May, that will help attract buyers and at those yield levels you are now compensated.”
Information for this briefing was found via Bloomberg. The author has no security or affiliation related to this organization. Not a buy or sell recommendation. Always do additional research and consult a professional before purchasing a title. The author holds no license.