Federal Reserve custody data shows that, as of the week ending May 6th, the balance of U.S. Treasuries held in custody for foreign official accounts decreased by $8.7 billion to $2.73 trillion. Furthermore, since late April, the USD/JPY exchange rate has decoupled from the movement of the 10-year U.S. Treasury yield, coinciding with the timing of Japan's suspected currency market intervention. As the largest foreign holder of U.S. debt, sustained Japanese selling could push Treasury yields higher.
The Fed custody data indicates that during the period of Japan's suspected market intervention, its holdings of U.S. Treasuries saw their first monthly decline, sparking market debate over whether Japan is liquidating U.S. government bonds to raise funds for yen support.
For the week ending May 6th, Federal Reserve figures show the balance of U.S. Treasuries held in custody for foreign official and international accounts fell by $8.7 billion to $2.73 trillion.
Additionally, since late April, the USD/JPY exchange rate has decoupled from the trajectory of the 10-year U.S. Treasury yield.
Bloomberg estimates that during the same period, Japan's Ministry of Finance spent approximately $54.7 billion to purchase yen. Rodrigo Catril, a senior foreign exchange strategist at an Australian bank in Sydney, stated:
The changes in the custody accounts appear to align with the events where Japan's Ministry of Finance instructed the Bank of Japan to intervene.
Yuxuan Tang of JPMorgan noted that the Bank of Japan allocated funds from its reserves, enabling Japanese authorities "to execute operations during U.S. trading hours, when the U.S. Treasury market is most liquid, helping to minimize market disruption."
He added that this is also why Japanese authorities prefer utilizing short-term U.S. Treasuries for such operations.
Japan is the largest foreign holder of U.S. Treasury securities. If Japan's Treasury holdings are indeed being reduced, it would exert further upward pressure on U.S. Treasury yields.
The actual scale of selling may far exceed the decline shown in custody data.
It is noteworthy that the $8.7 billion decrease reflected in the custody account data might represent only a small portion of the impact on U.S. Treasury market supply and demand from this intervention.
Shusuke Yamada, a foreign exchange and rates strategist at an American bank in Tokyo, pointed out in a research report that, reviewing historical intervention cases, the cash portion of Japan's foreign exchange reserves typically does not show a significant decline. He stated:
Assuming the same holds true this time, it implies a deterioration in supply and demand conditions in the relevant bond market—commonly understood as the U.S. Treasury market—of approximately $70 billion.
This estimated scale far surpasses the decline indicated by the Federal Reserve custody data.
This potential bond-selling activity by Japan comes as the U.S. Treasury market is already under pressure. Rising oil prices and market concerns that conflict involving Iran could exacerbate the U.S. fiscal deficit have been persistently pushing Treasury yields higher.
Rodrigo Catril noted that historical experience suggests foreign exchange interventions are often sporadic, but "if this becomes a regular occurrence, it could pose a substantive issue for the U.S. Treasury market."
Against this backdrop, it is reported that U.S. Treasury Secretary is set to visit Japan soon and is expected to meet with Japanese Prime Minister, the Finance Minister, and Bank of Japan Governor Kazuo Ueda.
Market risks exist, and investing requires caution. This article does not constitute personal investment advice, nor does it consider individual users' specific investment objectives, financial situations, or needs. Users should consider whether any opinions, views, or conclusions herein are suitable for their particular circumstances. Investment decisions based on this information are made at one's own risk.
Comments