The recent surge in longer-dated Treasury yields, reaching the highest levels in over a decade, can be attributed to Japanese investors. As some of the largest holders of U.S. government bonds, their actions have played a significant role in this increase.
On Wednesday, the 10-year Treasury yield stood at 4.245%, following a previous day’s close at 4.328%, which marked the highest level since 2007. Meanwhile, the 30-year yield dipped slightly to 4.337% after closing at its highest level since 2011 on Tuesday.
When yields rise, it indicates that bond prices are falling due to selling pressure. Economists and strategists believe that Japanese investors are responsible for this trend. Impressively, they currently hold $1.1 trillion worth of U.S. debt, surpassing China as the top foreign owners.
There is a possibility that Japanese investors are selling the U.S. 10-year benchmark while focusing on acquiring their domestic equivalent, as homegrown yields become increasingly enticing. Japan’s own 10-year benchmark, settled at 0.6614%, reached its highest level since 2014 on Tuesday. It has experienced a remarkable rise of 0.2145 percentage points since its low in July, marking the largest 18-trading day increase since April, according to Dow Jones Market Data.
The substantial gains align with a groundbreaking shift made by the Bank of Japan on July 28. The central bank granted greater flexibility for the 10-year yield to climb as high as 1%, expanding beyond its previous range of plus or minus 0.5%. This adjustment to the bank’s yield-curve control policy signifies their willingness to maintain low yields by purchasing significant amounts of Japanese government bonds when rates exceed their permitted range.
Consequently, Japanese investors have begun “looking at their own backyards” and restructuring their portfolios, according to Torsten Slok, the chief economist and partner at Apollo Global Management.
At first glance, it may appear peculiar that Japanese investors favor Japanese debt with a yield of less than 1% over U.S. Treasury notes nearing 4.5%. However, this preference arises from the fact that Japanese investors have capital in yen and safeguarding against exchange-rate fluctuations can be quite costly when dealing with U.S. Treasury notes issued in dollars.
The Impact of Japanese Investors on U.S. Yields
As the global bond market faces shifts in yield rates, the role of Japanese investors is becoming increasingly significant. Peter Boockvar, Chief Investment Officer at Bleakley Financial Group, explains that the cost of hedging out the dollar for Japanese investors purchasing U.S. Treasuries offsets the benefits of higher yields in the United States. One key contributor to the surge in U.S. yields is the Bank of Japan.
While most developed countries have increased their interest rates since the Covid-19 crisis, Japan has maintained its short-term policy rate at minus 0.1%. However, the recent relaxation of yield-curve control by the central bank is allowing 10-year yields to exceed 0.5%. This not only incentivizes Japanese investors to buy Japanese government debt but also signifies that Japan may no longer be the anchor for low rates.
This insight reinforces a well-known fact – the era of easy money is coming to an end worldwide. The expectation of higher rates is driving yields up in the United States. Additionally, stronger U.S. economic data suggests that the Federal Reserve will keep rates higher for longer in its effort to combat inflation. Another contributing factor is the increased issuance of longer-dated debt by the U.S. Treasury.
While Japan is currently adding approximately 35 basis points to global long rates, Chris Senyek, Chief Investment Strategist at Wolfe Research, anticipates a reversal in the near future. He expects the curve to become more deeply inverted, a sign that recession fears may soon arise.
In conclusion, Japanese investors have a significant impact on U.S. yields. As the bond market continues to change, the future implications remain uncertain. It is crucial to closely monitor these developments and their potential consequences for the global economy.
