Japanese Institutional Investors Sell US Treasuries Despite Rising Yields Due to Yen Weakness

US Treasury yields doubled this year, but yen hedging costs also soared

[Photo by AFP Yonhap News]

[Asia Economy Reporter Byunghee Park] It has been confirmed that Japanese institutional investors, major players in the U.S. Treasury market, have sold U.S. Treasuries amid a significant rise in U.S. Treasury yields recently.

According to Bloomberg on the 3rd (local time), BMO Capital Markets estimated that Japanese institutional investors sold about $60 billion worth of U.S. Treasuries over the past three months. Ben Jeffrey, a foreign exchange investment strategist at BMO, said, "There is a substantial amount of U.S. Treasury selling from Japan," adding, "The selling is similar to what was seen in early 2017."

The rise in U.S. Treasury yields is welcome news for Japanese institutional investors. Large institutional investors such as pension funds and life insurance companies prefer products that can preserve principal over the long term while earning stable interest income. If the yields on the safest financial product, U.S. Treasuries, rise, it can be considered an optimal condition.

The yield on the U.S. 10-year Treasury note nearly doubled from 1.53% at the end of last year to over 3% intraday on the 2nd, marking the first time since 2018.

On the other hand, the yield on the Japanese 10-year government bond remains near zero. The Bank of Japan (BOJ), the central bank, intervenes by purchasing bonds when the 10-year yield reaches 0.25%, preventing yield increases. For Japanese institutional investors, investing in U.S. Treasuries is much more advantageous than domestic bonds for interest income.

However, due to soaring currency hedging costs caused by the weak yen, the rise in U.S. Treasury yields has not translated into real interest income.

[Image source= Bloomberg]

Recently, the yen's value against the dollar has plummeted, increasing volatility, and foreign exchange hedging costs have risen to levels seen in early 2020 when the COVID-19 pandemic began. Hedging costs were around 0.3 percentage points a year ago but have surged to about 1.66 percentage points recently. Despite U.S. Treasury yields rising to 3%, the actual returns are analyzed to be only about 1.3% due to the high hedging costs.

Miura Ejiro, head of the bond department at Nissay Asset Management, said, "Hedging costs are becoming a key issue in U.S. Treasury investments."

Tatsuya Higuchi, senior manager at Mitsubishi UFJ Kokusai Asset Management, said, "Considering hedging costs, it is better to invest in Europe rather than the U.S. over the next six months."

This year, the yen has depreciated more than 13% against the dollar, while its decline against the euro is about 5%.

The U.S. central bank, the Federal Reserve (Fed), has already stopped quantitative easing by purchasing Treasuries. After the Federal Open Market Committee (FOMC) meeting on the 4th, it is expected to announce quantitative tightening (QT) to reduce its asset holdings. The Fed is expected to initially reduce holdings by letting bonds mature without reinvesting. However, after some time, it may actively reduce assets by selling bonds before maturity. In this case, if major players like Japanese institutional investors do not purchase, U.S. Treasury prices could fall sharply, and yields could rise rapidly.

This content was produced with the assistance of AI translation services.