Recent calm may be disturbed
Japan’s yen-buying currency market intervention may not be sending tremors through the U.S. bond market just yet, but that calm could be disturbed if Tokyo gets drawn into a drawn-out battle to prevent the exchange rate from weakening much further.
This minimizes the hit to the U.S. bond market - the sale of short-dated notes, especially bills, is more easily absorbed and the long end of the curve, which may be more vulnerable to pockets of illiquidity, remains untouched. Tokyo would likely consider other options to support the yen if need be - steps to encourage repatriation, tighter monetary policy, tapping currency swap lines with the Fed, accessing funds from other sources - before outright U.S. bond sales.“Japanese selling is not going to create big pressure in the Treasury market now,” notes Shekhar Hari Kumar, macro strategist at Exante Data.
These are big numbers, but Japan’s presence in the U.S. bond market has greatly diminished over the years. In August 2004, Japan owned 18.2% of all Treasury securities outstanding. That’s now barely 4%. Foreign official holdings of U.S. Treasury bonds at the end of February were around $3.5 trillion and holdings of bills stood at $266 billion. The total $3.76 trillion is the lower end of a $3.6 to $4.2 trillion range that has broadly held since 2011.
For it to become a problem, the scale of FX intervention would need to be on another level. That could mean the big Treasuries holders like Japan or China selling in size, or several countries selling at the same time.
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