U.S. bonds brace for impact of Japan’s currency moves (2024)

FAQs

Is Japan buying US Treasury bonds? ›

Japan is the world's largest foreign holder of Treasuries, but its footprint in the Treasuries market is tiny compared to what it once was. According to Treasury International Capital figures, Japan held $1.17 trillion in U.S. Treasury securities at the end of February.

If China (or any other nation that has a trade surplus with the U.S.) stops buying U.S. Treasuries or even starts dumping its U.S. forex reserves, its trade surplus would become a trade deficit—something which no export-oriented economy would want, as they would be worse off as a result.

Bond yields can also indicate risk sentiment in the market. Rising bond yields may suggest increasing confidence in the economy, which can lead to currency appreciation. Conversely, falling bond yields signal economic uncertainty and risk aversion, potentially leading to currency depreciation.

At the moment, investors are being driven to offload the yen due to a yawning gulf in interest rates between Japan and the United States. While the US Federal Reserve's benchmark interest rate is currently set at 5.25-5.50 percent, the Bank of Japan's (BOJ's) equivalent rate is just 0-0.1 percent.

Over three-quarters of the total national debt is public debt, which includes Treasury holdings by foreign countries. Japan is the largest foreign holder of public U.S. government debt, owning $1.15 trillion in debt as of January 2024.

Japan, the largest non-U.S. holder of Treasuries, increased its U.S. government debt to $1.167 trillion, the largest since August 2022 when the country's holdings were at $1.196 trillion.

Treasury bonds are considered risk-free assets, meaning there is no risk that the investor will lose their principal. In other words, investors that hold the bond until maturity are guaranteed their principal or initial investment.

Talk of de-dollarization is back on the table after new data from the US Treasury Department revealed that China offloaded close to $50 billion in US Treasuries in the first quarter and had reduced its holdings by more than $100 billion in the year through to March 2023.

Who does the United States owe the most debt to? As of July 2020, Japan overtook China and became the largest foreign debt collector for the U.S. The United States currently owes Japan about $1.2 trillion according to the U.S. Treasury report.

Investing in bonds can expose investors to currency risk because bonds have smaller profits to offset losses caused by currency fluctuations. Currency fluctuations in a foreign bond index often double a bond's return.

How do bonds affect the US dollar? ›

A lower interest rate typically results in lower Treasury yields, making bonds less attractive and possibly weakening the currency as investors seek higher returns elsewhere. Conversely, higher interest rates can increase Treasury yields, attracting more investment into bonds and potentially strengthening the currency.

When demand for the dollar increases then so does its value. Conversely, if the demand decreases, so does the value. The demand for the dollar increases when international parties, such as foreign citizens, foreign central banks, or foreign financial institutions demand more dollars.

1. Iranian Rial (IRR) 1 INR = 504.04 IRR. The Iranian rial is the cheapest currency in the world. The fall in its value can be explained by various factors.

Why is the yen crashing? The main reason is that dollar interest rates are much higher than yen rates — 1 month U.S. Treasury bill rates currently yield close to 5.5% while 1 month bills in Japan pay a paltry 0.2%. It doesn't take a financial engineer to see that one is a lot more attractive than the other.

The Japanese yen has been steadily depreciating since the beginning of the year, thanks in part to the delayed prospect of rate cuts by the US Federal Reserve and the strength of the US economy. Goldman Sachs Research expects the yen to remain at or above 150 to the dollar over a 12-month horizon.

The buyer base for US Treasuries has shifted from yield-insensitive buyers (sovereign wealth funds and central banks, including the Fed) to yield-sensitive buyers (US households, US pensions, US insurance), see chart below.

The BOJ has been an aggressive bond buyer to defend its ultra-low rate policy. That has pushed its ownership to more than half the market, putting a squeeze on liquidity and impairing market function.

The three largest holders of Treasuries -- Japan, China and the UK -- led the purchase U.S. government debt.

Though China owns a large amount of U.S. debt, it isn't the United States's largest creditor. The greatest amount of U.S. debt is owned by the U.S. government, while the largest foreign creditor is Japan. China owns around 2.6% of U.S. debt, which it buys because the Chinese yuan is pegged to the dollar.