Stronger Yen Sparks Warning for US Treasury Investors

The US-Japan intervention to strengthen the yen in July may have been seen as positive for U.S. long-end Treasuries, but some experts are warning that a stronger yen could actually create selling pressure on these investments.

Japan is the largest foreign holder of U.S. Treasuries, and supporting the yen might reduce Japan's need to sell its holdings to buy more yen. However, a stronger yen makes the yen carry trade less attractive, which means some investors may unwind their positions in US Treasuries.

Dennis Swanson notes that if the USD/JPY breaks out of its recent uptrend and the BOJ continues to hike interest rates, the Treasury risk will become much more serious. He compares the yen carry trade to Nassim Taleb's concept of nonlinear shocks, fragility, and systems that respond poorly to stress.