The cost of foreign exchange hedging decreases, and U.S. Treasuries are expected to welcome Japanese buyers again?
Due to Trump's election victory pushing up U.S. Treasury yields, and the Federal Reserve's interest rate cuts reducing hedging costs, the yen-hedged U.S. Treasury yield will turn positive for the first time in two years. Although Japanese investors were net buyers of U.S. Treasuries at the beginning of this year, they subsequently turned into sellers, offloading $24.4 billion in U.S. Treasuries. The decline in foreign exchange hedging costs may make the U.S. market more attractive to Japanese investors
The Zhitong Finance APP noted that due to Trump's election victory pushing up U.S. Treasury yields, and the Federal Reserve's rate cuts lowering hedging costs, the yen-hedged U.S. Treasury yield will turn positive for the first time in two years.
On Tuesday, the yen-hedged 10-year U.S. Treasury yield rose to negative 13 basis points, a yield level that has taken into account the cost of hedging against a potential decline in the dollar against the yen. The cost of shorting the dollar has increased due to the Federal Reserve's rate hikes, keeping the hedging yield below zero since September 2022.
The rise in U.S. Treasury yields has sparked a debate: will Japanese investors return to this asset class during the Federal Reserve's easing cycle, or will they stay away due to Trump's tariff increases and tax cuts leading to further yield increases?
Data from the U.S. Treasury Department shows that in the first three months of this year, Japanese investors were net buyers of U.S. Treasuries, but have since turned into sellers. From January to August this year, Japanese investors sold a total of $24.4 billion in U.S. Treasuries.
Nevertheless, funds from Asian countries purchased over $1 billion in U.S. agency and corporate bonds during this period, indicating a shift towards higher-yielding bonds to offset still excessive hedging costs and currency risks.
The cost for investors to hedge against the dollar's decline against the yen over the past three months has fallen from a peak of 6.01% a year ago to 4.56%.
Martin Whetton, head of financial market strategy at Westpac Bank in Sydney, stated, "The cost of forex hedging remains too high, but if the yield turns positive after deducting hedging costs, this situation may change slightly. Given that the 10-year Japanese government bond yield is around 1%, the yield still cannot compete with Japanese government bonds."
Sonar Desai, Chief Investment Officer of Fixed Income at Franklin Templeton, stated that the decline in currency hedging costs "has affected Japan's demand for investment-grade securities and taxable municipal bonds, and we believe this is a very interesting area." "As hedging costs decline, different parts of the U.S. market will certainly become more attractive."