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After a buying spree, investors are wondering if Japanese investors will continue to buy U.S. Treasury bonds. Kate Guguid reports for the Financial Times:
Japanese investors have piled into foreign debt this year — but analysts have warned that the revival in demand from one of the cornerstones of the US Treasury market is unlikely to last.
Data from Japan’s ministry of finance reported this week showed that investors bought ¥4.1tn ($30bn) of foreign debt in February, the largest total since September 2021. That follows net buying of ¥1.1tn in January, and marks a pause in the dramatic selling of foreign debt in 2022.
The big rise in yields over the past year in markets outside Japan is theoretically a big draw for the country’s banks, insurers and pension funds, who face rock-bottom returns at home. However, the high cost of hedging foreign bond holdings against swings in the yen exchange rate — which most Japanese investors prefer to do — wipes out those extra returns and was likely to mean the current buying spree is shortlived, analysts said.
“The cost of hedging is already prohibitive and with current expectations about the [US Federal Reserve’s] path, is set to become more prohibitive,” said Brad Setser, a senior fellow at the Council on Foreign Relations. “You’re not going to get the sustained demand from Japan that you got a few years ago.”
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