The largest foreign holder of US Treasuries is seeing its highest domestic yields in thirty years — and when staying at home becomes profitable, the world loses its most important buyer of bonds. An examination of the points through which rising yields move from Tokyo to New York.
The 10-year Japanese Government Bonds (JGB) yield reached 2.95% on 18 August — its highest level since 1996 — while the 30-year maturity recorded around 4.14%, at record levels since issuance began in 1999. On the same day, the US 30-year Treasury yield touched 5.33%, its highest since 2007. This coincidence is no accident: Japan is the largest foreign holder of US Treasuries, with holdings of 1.116 trillion dollars, and reduced its holdings by around 27 billion dollars in June alone, according to Treasury International Capital (TIC) data.
The mechanism measured in this report is simple in essence: for decades, Japanese institutional savers accepted a near-zero domestic yield, taking their savings abroad to buy US and European bonds. Today, their home market pays 2.92% at 10 years and 4.14% at 30 years — while the US yield, after deducting Currency Hedging costs, leaves only around ~1.8% (EL7 estimate). The 10-year yield differential between the two countries has narrowed to around 1.80 percentage points, and our positioning indicators show leveraged funds have cut their net short yen positions by roughly half in two weeks. When the world's largest creditor returns home, the price of money rises everywhere else — and that is precisely what markets are pricing this week.
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