(Bloomberg) — Currency-hedged Treasury yields for Japanese investors have risen above zero for the first time in more than two years as the Federal Reserve cut interest rates.
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Yen-hedged 10-year US notes yielded 0.28%, after staying below zero since September 2022. Hedge costs, which are largely driven by differences in short-term interest rates between two economies, have slid about 170 basis points from a peak set in October 2023 as the Fed embarked on policy easing while the the Bank of Japan raised borrowing costs.
“Positive hedged yields increase investment appeal for US bonds,” said Eiichiro Miura, head of the strategic investment department at Nissay Asset Management Corp. in Tokyo. “Some investors may become more constructive in the next fiscal year” starting in April, he said.
While hedged Treasury yields are still regarded as insufficient for many local investors, because they are about a quarter of what Japanese 10-year notes provide, money managers have been flocking to US debt without using currency protection.
“The Japanese inflows into US bonds were probably driven by investors targeting foreign-exchange gains,” said Ayako Sera, a market strategist at Sumitomo Mitsui Trust Bank Ltd. in Tokyo. “With US yields above 4%, it makes sense to try to profit both from capital gains in debt and currency returns when a drop in dollar-yen provides dip-buying opportunities.”
Net purchases of US bonds totaled ¥15.1 trillion ($96 billion) in the first 10 months of this year after climbing to a record ¥20 trillion for the January-October period last year, according to the latest Ministry of Finance data compiled by Bloomberg.
Japan’s currency weakened about 7% against the dollar from January to October, even after the BOJ tightened policy twice in that period. The currency depreciated around twice that amount during the same period a year earlier.
“The BOJ is likely to raise interest rates only slowly,” said Keisuke Tsuruta, a senior fixed income strategist at Mitsubishi UFJ Morgan Stanley Securities Co. in Tokyo. As such, “we don’t expect much of a decline in currency hedging costs from the Japanese side.”
–With assistance from Mia Glass, Saburo Funabiki and Masahiro Hidaka.
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