Photo: Reuters/Thomas White
Photo: Reuters/Thomas White

recent Bloomberg story warned of “Japan dumping Treasuries,” although the story actually said that rising hedging costs for Treasuries might eventually prompt Japan to sell Treasuries, in the opinion of a brokerage-house analyst.

Once again, it’s Bloomberg fake news.

A glance at the data shows that Japan’s interest in Treasuries is guided by the same factors that have prevailed for years. Nothing has changed.

When the US dollar cheapens, Japanese investors tend to buy more Treasuries (because they are cheaper). We observe a close relationship between the Japanese yen exchange rate and the US Treasury yield during 2017, as in the chart below. The relationship broke down at the end of December, though: Treasury yields rose sharply while the dollar cheapened. Does that mean the Japanese are dumping?

The discrepancy vanishes when we look at the “real” and “inflation” components of the Treasury yield, separately. Japanese investors appear more concerned with the yield on Treasury Inflation Protected Securities, whose return is indexed to the US Consumer Price Index.

The inflation component of the Treasury yield (the difference between the nominal coupon yield and the TIPS yield) typically tracks oil and other commodity prices.

The yen exchange rate and the oil price explain different components of the Treasury yield, respectively. If we put both variables in a regression equation against the all-in 10-year Treasury yield, we obtain a very good fit.

Nothing has changed, in other words. It’s just more fake news from Bloomberg. Nothing to see here, folks. Keep moving.

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