- Japanese investors bought ¥4.1tn ($30bn) of foreign debt in February, the largest total since September 2021.
- 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.
- The high cost of hedging foreign bond holdings against swings in the yen exchange rate wipes out those extra returns.
- The cost of hedging is already prohibitive and with current expectations about the [US Federal Reserve’s] path, is set to become more prohibitive.
- Japanese buying of foreign bonds “ultimately comes down to the hedging costs, which is aligned with the fed funds rate.”.
Investors warn Japan’s foreign bond buying spree is at risk
Japanese investors have piled into foreign debt this year but analysts warn that the revival in demand from one of the cornerstones of the US Treasury market is unlikely to last due to high cost of hedging.