Tag: Japan

On Monday, I asked whether Japanese selling of Treasuries is a risk. Today, Bloomberg reported that the risk may be much broader than just Japan.

Countries most aligned with the U.S. bought a net $174.3 billion of Treasury notes and bonds in the first eight months of 2026, according to Bloomberg’s analysis of Treasury and State Department data. That’s the least for the period since 2021 and down more than 60% from a year earlier. Bloomberg ranks alignment by how often countries vote with the U.S. at the United Nations.

Asia led the retreat:

• Japan, the biggest foreign holder, bought just $389 million, down 99% from a year earlier.
• South Korea sold $23.8 billion, the most for the period in records going back to 1977.
• Taiwan was also a net seller.

The least-aligned countries bought $17.1 billion, reversing four straight years of selling over the same period. China remained the biggest seller, while the UK, Hong Kong and India were the biggest buyers. The data cover both government and private investors, and Bloomberg notes that holdings can be credited to the country where they’re held through custodians rather than to the actual owner.

Bloomberg cites weak currencies, rising yields at home, growing demand for stocks and unease over U.S. policy as possible factors. The yen hit a four-decade low this year, and the won fell to its weakest since 2009.

“The Treasury market isn’t losing foreign buyers — it’s losing automatic buyers,” Masahiko Loo, a senior fixed-income strategist at State Street Investment Management, told Bloomberg.

Private investors, including hedge funds, banks and mutual funds, have stepped in, lifting their share of federal debt to about 70%, near the highest since 1990. Foreigners still owned $7.85 trillion of Treasuries as of August, near a record. But their share of the market has shrunk to less than a third, from a peak of 52% in 2012.

The tradeoff is price. “The Treasury will fund itself — the question is the price and the volatility of the price,” said Shoki Omori, Deutsche Bank’s chief fixed-income strategist for Japan..

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.