"It Was A Deer In Headlights Moment": Japan Dumps Most US Treasuries Since May 2013

Tyler Durden's picture

With the December monthly TIC data due out this week, bond traders will be closely watching if the selling of US Treasuries by foreign accounts, and especially central banks, which as we have repeatedly shown for the past several months has hit record levels... 

... will persist, with a focus on whether China's near record selling of US paper will persist.

However, this time the surprise may not be China, but its nemesis across the East China Sea, Japan.

As UBS notes, Japanese investor appetite for developed market overseas bonds, and especially US, was a big story during the first seven months of 2016. However, since then interest has waned. Weekly flow data underscores how Japanese investors sold ~¥4 trillion of overseas bonds from the time of the US presidential election to the end of Jan-17. Last week the Japanese government released more granular data for the month of December which highlights a number of notable developments.

Most importantly, while December saw the largest overall net selling flow of overseas bonds since Jun-15, this was entirely due to offloading of US Treasuries – other developed bond markets on aggregate actually saw modest net purchases. Indeed, while Japanese investors bought German and Australian paper, US Treasuries were sold to the tune of ~¥2.4 trillion (~$21bn) in December, the largest net selling flow since May-13.

While last month (i.e. data for November) there were several factors that supported a rebound in Japanese investor demand for overseas debt (e.g., calmer market conditions, higher overseas FX-hedged yields, and supportive seasonality in Q1, a Trump honeymoon that was still in its early stages), so far there is little evidence of any bounce back in December, when yields surged across the curve, spurring widespread sales. Reuters and Bloomberg interviews with Japanese investors suggest that US political concerns and the potential for further Fed hikes are weighing on demand. Still, the potential for reallocation flows should not be overlooked, as highlighted by today's data.

The selling has been so acute that after ignoring it for months (we first noted the record sales last September), the relentless selling has attracted the attention of Bloomberg which writes that "the consensus is clear: few overseas investors want to step into the $13.9 trillion U.S. Treasury market right now. Whether it’s the prospect of bigger deficits and more inflation under President Donald Trump or higher interest rates from the Federal Reserve, the world’s safest debt market seems less of a sure thing -- particularly after the upswing in yields since November. And then there is Trump’s penchant for saber rattling, which has made staying home that much easier."

[A]ny consistent drop-off in foreign demand could have lasting consequences on America’s ability to finance itself cheaply, particularly in light of Trump’s ambitious plans to boost infrastructure spending, cut taxes and put “America First.” The president has singled out Japan and China, the two biggest overseas creditors, as well as Germany, for devaluing their currencies to gain an unfair advantage in trade.

Whether Bloomberg is correct - especially after a brief rebound in the amount of Treasurys held in custody at the Fed in December - remains to be seen, some of the comments Bloomberg cites are worth nothing, the first of chich comes from a bond strategist at Japan's Mitsubishi UFJ:

“It may be more difficult than usual for Japanese to invest in Treasuries and the dollar this year because of political uncertainty,” said Kenta Inoue, chief strategist for overseas bond investments at Mitsubishi UFJ Morgan Stanley Securities in Tokyo. “Treasury yields may rise rapidly again in the near future, which will continue to discourage them from buying aggressively.”

Of course, the higher the yields go, the greater the implicit demand for yields should be, however in a world where everything is one giant momentum trade, it may take a while before it emerges.

Which is for now, other bond strategists agree with Inoue: "For now, risk-averse bond buyers like Daiwa SB Investments’s Shinji Kunibe are cutting back on Treasuries."

Like many institutional money managers that invest abroad, Kunibe, Daiwa SB’s head of fixed-income management, likes to hedge away the risk of the dollar’s ups and downs. And right now, it makes sense. After accounting for hedging costs, 10-year Treasuries yield about 0.9 percent, roughly 10 times the return offered by Japanese government bonds. Going back to the 1980s, Treasuries have rarely enjoyed such a big edge over JGBs. However, he sees U.S. yields rising further as Trump pursues expansionary fiscal policies and takes a protectionist stance on trade. “Yields are going to be in an uptrend,” he said.

As Bloomberg puts it, investors like Kunibe can ill-afford more losses. Japanese demand for US paper first slid into the late summer as hedging costs - mostly in the form of swap spreads - rose...


...  last quarter, Japanese investors who hedged all their dollar exposure in Treasuries suffered a 4.7 percent loss, the biggest in at least three decades, Bloomberg reports citing data from Bank of America showed. The same thing happened in Europe, where record currency-hedged losses also stung euro-based buyers.

It was a deer in the headlights moment,” said Zoltan Pozsar, a research analyst at Credit Suisse.

While the yield pick up in recent weeks has made hedged positions profitable relative to JGBs once again, the Japanese are not rushing in.

Combined with the unpredictability of Trump’s tweet storms, interest-rate increases in the U.S. could further sap overseas demand. Mark Dowding, who helps oversees about $50 billion as co-head of investment-grade debt at BlueBay Asset Management in London, says the firm has already moved to insulate itself from further losses due to higher rates.


What’s more, central bankers in Japan and Europe are still experimenting with monetary policies that may benefit bond investors locally.


Right now, it’s just “much easier to stay home than go abroad,” said Shyam Rajan, Bank of America’s head of U.S. rates strategy.

Unless, of course, the BOJ, which has been experimenting with "curve control", and nearly lost it  last week, fails to maintain the long end at the desired range. Once that happens, and global bond curves become unhinged leading to a worldwide dumping of duration, it may be time to head for the exits.

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nmewn's picture

For every seller there is a buyer.

A bag holder or a profiteer remains the question ;-)

algol_dog's picture

So everybody's selling. Who the fuck is buying?

PlayMoney's picture

Mama Yellen of course. She knows if the 10 year hits 3% bad juju will happen and that won't be tolerated.

Vlad the Inhaler's picture

Domestic investors are buying. 

Dead Canary's picture

The Fed and other central banks? (With printed money)

yogibear's picture

The central banks are all buying each other's debt. They have to. Othewise it's a depression far beyond anything in history. Off the books of course.

They have to with infinite printing. Fiat is backed by nothing, but it doesn't matter.

Goldilocks's picture


Ex-Plunge Protection Team Whistleblower: "Governments Control Markets; There Is No Price Discovery Anymore"

Working Group on Financial Markets (PPT)

brianshell's picture

Price discovery isn't easy when the PPT starts up the smoke machine. So, if the Fed raises interest rate to 5%, the government will default? No, they just borrow more from the Fed. When will the full faith in dollars crack? If the Fed wishes to stay in "power" they can't change course. Unless, that is, if they have a plan to crash the system and go another way.. Banks have been creating pulsations in the economy for many many years as a profit generator. Now that all the world is under the banking cartel's thumb, maybe they decide to "pulsate". After all, they have purchased a hell of a lot of private stocks and bonds as well as forcing many whole countires into eternal debt servitude.

NoDebt's picture

This is rearview mirror data.


SeuMadruga's picture

Like in the Jurassic Park movie ?

holdbuysell's picture

Yellen will fall in line and buy everything not nailed down to keep yields low. Sub 1 10-year is inevitable.

They are literally going full throttle into the imminent brick wall, hoping for...anything up to and including a meteor strike to deflect the blame.

There is no plan B.

And, hope is not a strategy.

tarabel's picture



So, my take on this story is that the Japanese and many other overseas investors are anticipating a rise in UST interest rates, which makes it foolish to invest now and take an immediate hit soon thereafter.

But there will be plenty of action once the rate goes up.

So what do they know that we don't know? Given that raising rates would dampen the economy and murderize the government's annual deficits, it suggests that is exactly what the Fed has on tap.

A knitting needle in the eye of the heretical Donald John Trump. 

booboo's picture

desperate times require desperate measures, what is to stop a government from disolving the central banks once they finally figure out they are parasites and printing their own greenbacks. I know its far fetched but these are desperate times.

lasvegaspersona's picture

In spite of the thin veil of separation the CBs are the government...yeah, yeah I know...owned by the banks not the government etc...it is an illusion so politicians aren't blamed for the collapse.

DownWithYogaPants's picture

I believe your outlook to be inaccurate.

The banks puppeteer the government.  They let the voters vote in one of their engineered choices.  Trump snuck in and now is a Niggerian in the woodpile and they ain't happy.

Try issuing greenbacks and then riding around Dallas in an open topped limo then get back to me.

lasvegaspersona's picture

The dollar is likely to keep central bank support but private parties can and may get out...that is all it will take. Yelln will buy all and the value of the dollar will crash.

pliny the longer's picture

horrrreeeeee fukkk!!!!  godzirrraaaaa!!!!!

biggest non-news event of the week 

O C Sure's picture

debt restructuring

WTFUD's picture

He who panics first panics best!

Arrowshot's picture

Interesting considering that PM Abe just visited the US. Planned destruction for Yeltsin or just trying to get us back on an even keel albeit gradually hopefully.

lasvegaspersona's picture

This is the natural consequence of where Trump is going. A weaker dollar (til it is dead weak!) and easier to pay debt. Then once we get our "New Dollar™" we can compete on equal footing. The standard of living will drop but we will put folks back to work and bring industry back.

besnook's picture

wouldn't that be ironic if the usa becames the manufacturer for the chinese muiddle class. if that is the plan it is brilliant. if they blundered into it, it is still brilliant. all americans go broke apiring for a microhome but everyone has a job and can feed their family on 100 new american dollar/wk.

inflation is coming.

charlie303's picture
charlie303 (not verified) lasvegaspersona Feb 13, 2017 6:41 AM

You can't weaken the US dollar through tweets alone. How does Trump propose to do that with The Fed still talking about 3 hikes this year?

OpTwoMistic's picture

You cannot weaken the reserve currency at all without destroying all fiat. New "dollar" one for five or is it ten?  PMs and bitcoin or be ruined. You will not sell your stocks when the credit market freezes and the gold market goes no bid.

onwisconsinbadger's picture

Abe won the golf game with Drumpf. BOJ must print and buy US stawks.

besnook's picture

gosh, i thought a higher interest rate would attract investment. lol

japan only needs enough dollars to transact 110 billion in trade with the usa. their biggest trade partner by 4 times is china and growing. china and japan have a yuan/yen swap agreement that needs no dollar and now there is the ability to swap all the currencies in asia nad the pacific. they have a yen swap agreement with iran, their biggest oil supplier and have contracted with russia for a direct pipeline.

japan is also making deals with russia. how come japan can make deals with russia but germany can't? curious, neh?

unklemunky's picture

I know. Right? Don't use common sense here too much. Some people only like to type stupid shit like "stackin phyzzzz" And bitchezzzzzzz. You are right on the money. US treasury yields rise and yield starved investors seek safe haven and cap the rise. Look for stocks to soften a bit. The market needs to start repricing risk. Period.

Jtrillian's picture

To all of those who are asking who is buying, you need to understand that the central banks (specifically the FED, BOJ, and ECB) have all been buying their own treasuries by massively expanding the money supply.  It is a massive ponzi scheme designed to keep the system going at all costs.  The moment they started doing this, it became a slow death for the Western economy. 

Now with the selling of treasuries, bitcoin and to some extent precious metals, we are witnessing Greshams law in action as faith is being lost in fiat currencies (and for good reason).  More and more, folks are fleeing to "sound money" in an attempt to preserve what little they have.  The governments of the world had a chance to set things on track by reigning in the out of control banks that caused the financial crisis, but they were in fact REWARDED.  Today, the systemic risk in the markets is worse than ever and we have multiple bubbles beginning to pop (like student loans, subprime auto, pensions, corporate debt, etc.).  This time around, there is no government on Earth that can stop the collapse without massive stimulus that makes the trillions we've accumulated so far look like a practice run. 

Today corruption and the banksters are totally out of control.  The only thing that will stop them is for the people to rise up against them.  They will continue to hyper-inflate their respective economies until they own every last peice of equity, land, and treasury on the market.  Left unchecked, these psychopaths will usher in a new age of neo-feudalism where the Central Bankers (and those they answer to) are at the top of the food chain. 

It's a very troubling time we are living in for those who are paying attention.  The founding fathers warned us repeatedly of the dangers that the banks would impose on the masses if left unchecked. 

yellensNIRPles's picture

What we are witnessing is in short the death of the Petrodollar and the emergence of new world superpowers. Grant Williams lays out exactly what is going on in this video: 2016 Mines & Money Presentation - Get it. Got it? Good.

It is one of the few videos I have seen in years which clearly shows why things like Japan selling US treasuries are happening. All of this is planned, and has been years in the making.

None of this should be taking us by surprise. 

unklemunky's picture

The end of the petroleum dollar again. Oohhhh nooooo. China.,,,Japan....Russia......oooooh. Whatever. Like it or not, the US is still the most trusted place on the planet. I know that is not saying much, but if you think the rest of the world is going to put their faith in China as reserve, you are smoking crack. Besides, who says the Middle East has a corner on the oil production. If the US increases output and dumps oil on the world market on a massive scale will it not still be tied the the USD? Yup. You bet your ass it will. The people who have had their boot on the throats of American energy production have had their legs cut off. Now it is the accelerator the saudis need to fear. Petro dollar is here to stay. Usd tied to US oil, nat gas, coal.

yogibear's picture

Janet Yellen and William Dudley busy buying all of them.

Go ahead China and Japan, the fed money printers will laugh at you.

Last of the Middle Class's picture

If all these multinationals like Apple built products in other countries based on their continued purchase of US treasures, tit for tat, this could get ugly. Sorry guys, we're going to need those jobs back here in the US. Funny how everything a leader does is somehow blocked by bankers. That is the recurring theme of our economy now. Don't forget the bankers!!!!! At some point it may become them or us and as a nearly vanished middle class member, I'm voting for us. The rest, as they say is a slow motion train wreck. Grab the popcorn.

unklemunky's picture

So, the assumption is, that as US treasury yields increase, there will be no takers? Bullshit. The yield is only going to get so high before the yield starved investors start to pile on. Sure, its the catching the falling knife scenario, but when everyone else is driving to negative interest rates, the so called baby boomers are looking for yield. So which is it? More bla bla bla. Just like the rest of the market, for every losing scenario there is a winning scenario. That's why it's called......a market..duh.

Money_for_Nothing's picture

Read Michael Pettis book. If a country wants to run a trade surplus then they buy Government bonds of a trade deficit country. Japan is probably selling because of other pressures (eg cash flow). Maybe export sales are down and they have to sell bonds to buy energy?

Ban KKiller's picture

Smoke and mirrors while playing Russian roulette with one empty chamber. So  I'll pick a date...May 23rd,2017. Pulled it out of my ass but that is the date wall street drops 600 points. Unless it's a full moon. Mr yellen told me.

Econogeek's picture

Our trade deficit with Japan is all the ammunition Trump needs to get the Japanese to stop selling Tsys.  Same for China.

Why Bother's picture

It makes you wonder if the dumping of treasuries by the biggest creditors, China and Japan will make any significant impact on treasury rates? I think they are slowly dumping treasuries to not make an impact - for their own selfish reasons because rate hikes will affect them too. China owns over $1 trillion in US Treasuries. American Flaggots and blood thirsty war mongers hate it but the country they love to hate owns them. LOL.

Why Bother's picture

It makes you wonder if the dumping of treasuries by the biggest creditors, China and Japan will make any significant impact on treasury rates? I think they are slowly dumping treasuries to not make an impact - for their own selfish reasons because rate hikes will affect them too. China owns over $1 trillion in US Treasuries. American Flaggots and blood thirsty war mongers hate it but the country they love to hate owns them. LOL.