Japanese Investors Accelerate Selling US Treasuries

Japanese international balance of payments data show that in the first quarter of this year (as of March 31), Japanese investors have net sold a total of 4.67 trillion yen (about 29.6 billion US dollars) in U.S. government bonds, agency debt, and local debt, which is the highest quarterly sell-off since the second quarter of 2022.

The reversal of the Federal Reserve's expectations is the core trigger

In February this year, before the United States and Israel conducted joint military operations against Iran, the Overnight Index Swap (OIS) market indicated that traders expected the Federal Reserve to cut interest rates twice this year. Subsequently, oil prices surged by about 50%, and expectations of accelerating inflation have risen. The market pricing has shifted from rate cuts to rate hikes—this drastic change directly triggered adjustments in Japanese investors' positions.

Bloomberg cited Nomura Securities senior interest rate strategist Naokazu Shimizu as saying: "The intensity of the position adjustment is quite strong. The outlook is extremely uncertain, and it's not only a question of how long the rate cut may be delayed, but the next step may even become a rate hike, which is hard to predict now."

He pointed out that the market had been operating under the premise that "interest rate cuts will eventually come," which had supported buying behavior, especially in the mortgage-backed securities (MBS) sector.

The latest data from the U.S. Treasury also shows that in the first two months of this year, Japanese investors have net sold 414 million US dollars in U.S. agency debt.

The flow of Japanese funds to U.S. debt is not negligible

Japan is one of the largest foreign holders of U.S. Treasury securities, and adjustments in asset allocation by Japanese investors have a systemic impact on U.S. Treasury yields.

Amidst the drastic swings in Federal Reserve policy expectations and persistently higher than expected inflation data, the continued reduction of Japanese funds will provide additional upward pressure on U.S. Treasury yields, which are already operating at high levels.