Thoughts about Japan and US Treasuries - BBH

"The US Treasury International Capital report for the month of November 2017 was released yesterday.  It showed that the two largest foreign holders of US Treasuries, China, and Japan, were net sellers," BBH economists note.

Key quotes

China sold about $12.6 bln and Japan sold about $9 bln of US Treasuries.  Foreign investors sold $6.4 bln of Treasuries, meaning that outside of China and Japan, other foreign investors were net small buyers of Treasuries. 

Sometimes the monthly data print obscures the larger picture.  Consider that last year through November, the TIC data shows foreign investors bought $390 bln of US Treasuries.  The US runs a current account deficit and therefore must import capital.  In the first nine months of 2017, the US current account deficit was about $338 bln.

Some observers have been playing up the increased cost to hedge Treasuries as a reason Japanese investors sold Treasuries.  The TIC data shows that Japanese investors were net sellers of Treasuries from August through November to the tune of about $30 bln, which is a minuscule fraction of its holdings.  

On one hand, Japanese institutional investors are thought to be attract by the high yields available in the US Treasury market.  On the other hand, the wider differentials at short-end make hedging the currency risk more expensive.   This may help explain why Japanese institutional investors have preferred European bonds, according to the recent MOF data.  Japanese investors have preferred UK, Swedish, and French bonds.   

There also appears to be a large seasonal factor that few observers have recognized.  Specifically, over the past decade, Japan often accumulates Treasuries in the first part of the calendar year.  It has been biased in the past several years to be sellers late in the year. From 2007 through 2016, Japanese investors sold Treasuries in December in seven of the 10 years.   Beginning in 2015 and running through 2017, Japanese investors consistently sold US Treasuries from August through December without fail.  In the middle of next month, the TIC data for December 2017 will confirm our suspicions that Japanese investors sold Treasuries last month.