Japanese Investors Favour Domestic Bonds Over US Treasurys Amid Yen Intervention

The US-Japan yen intervention has brought attention to another challenge for Treasurys. Markets feared Japan might have to sell Treasurys to defend the yen, but another challenge may be where Japanese investors put their money.

Japanese investors historically buy US Treasurys when they offer a better return than Japanese government bonds after hedging currency risk. However, recent months have seen a rise in the benchmark 10-year Japanese government bond yield to its highest level since the 1990s as investors demand greater returns.

This has made domestic government debt increasingly competitive with currency-hedged US Treasurys, giving Japanese investors more reason to keep money at home. If Japanese investors increasingly favor domestic government bonds over currency-hedged US Treasurys, Japanese demand for US government debt could weaken just as Washington needs foreign buyers to help absorb record borrowing.