(Bloomberg) — In times of Treasury turmoil, the biggest investor outside American soil has historically lent a helping hand. Not this time round.
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Japanese institutional managers — known for their legendary U.S. debt buying sprees in recent decades — are now fueling the great bond selloff just as the Federal Reserve pares its $9 trillion balance sheet.
The latest data from BMO Capital Markets show the largest overseas holder of Treasuries has offloaded almost $60 billion over the past three months. While that may be small change relative to the Japan’s $1.3 trillion stockpile, the divestment threatens to grow.
That’s because the monetary path between the U.S. and the Asian nation is diverging ever more, the yen is plumbing 20-year lows and market volatility stateside is breaking out. All that is ramping up currency-hedging costs and completely offsetting the appeal of higher nominal U.S. yields, especially among large life insurers.
Read more: New Waves of Treasury Selling to Push Yields Over 3%: MLIV Pulse
The upshot: Japanese accounts are contributing to the historic Treasury rout and may not return en masse until the benchmark 10-year yield trades firmly above 3%. In fact, near-zero-yielding bonds at home look ever-more appealing even as U.S. debt offers some of the highest rates in years.
“It’s a significant amount of selling and on par with what we saw in early 2017 from Japan,” said Ben Jeffery, BMO’s rates strategist.
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