Is Japan Selling of Treasuries a Risk?
Economic analyst Christophe Barraud, Head of Discretionary Management and Research at LIOR GP, had an X post last week with his thoughts on the selling by Japanese investors in global bonds “for five consecutive weeks, the longest selling streak in four years.” [post at the bottom].
As he noted, “the consequences for global bond markets could be significant,” with Japanese yields now trading above US equivalents once hedging costs are taken into account.
“Japanese life insurers manage around $2.5 trillion in assets. Several are already planning to maintain or increase their purchases of domestic bonds so we could be looking at a gradual reallocation of capital over several years.”
Given that backdrop, I had Claude do an analysis of how Japan’s flows line up with US 10-year yields, using Bank of Japan data on Japanese net purchases of foreign securities. Its takeaways were consistent with the risk Christophe flagged:
1. Japan flows do have a strong correlation with the change in 10-year yields. Comparing rolling 12-month net purchases to the 12-month change in the US 10Y results in a correlation of about −0.66 since 2014. That is consistent with Japanese selling driving yields. The 2013 taper tantrum and 2022 stand out.
2. Neither series, though, conclusively leads the other; the fit is tightest when both are measured over the same period. So while that’s consistent with Japanese selling pushing yields up (which makes a lot of sense), it is equally consistent with sharp rises/drops in yields and hedging costs pushing/pulling Japanese investors out/in. In 2022, the cost of hedging dollars back into yen went from roughly 0.2% to over 4%, and Japan sold a record amount of foreign bonds.
3. Flows have little correlation with a given level of 10-year yields. The correlation between Japan’s rolling 12-month net purchases and the US 10Y level is weak: about −0.14 since 1997 and −0.4 since 2014.
So it seems the reallocation risk is very real if higher Japanese yields do pull flows back home.
