Wall Street wary of Japanese bond sell-off domino effect

Wall Street's vigilance against rising global interest rates is intensifying (Reuters)

Interest rates have risen in various countries, with the largest increase in Japan. Wall Street is on high alert for a further rise in Japan's long-term interest rates and the spread of bond selling globally. As losses widen due to the decline in Japanese government bonds, Japanese investors are likely to sell U.S. Treasuries and other assets in order to lock in book profits and control risks...

The rise in global long-term interest rates (fall in bond prices) has begun to affect stock prices. On May 20th, the U.S. Dow Jones Industrial Average rebounded after U.S. President Trump said that the Iran issue was in the "final stage," but it still did not reach the peak in February, and the lackluster upward trend continues.

The factors driving up long-term interest rates are obvious: vigilance against inflation caused by rising oil prices after the U.S.-Iran conflict and the deterioration of the fiscal situation in the United States and other countries. As concerns about rising corporate financing costs and sluggish consumption intensify, it becomes difficult for stock prices to rise.

Interest rates have risen in various countries, with the largest increase in Japan. The yield on Japan's 10-year government bonds soared to 2.8% on May 18th, reaching a 29-and-a-half-year high.

In the case of Japan, there is a side where the policy responses that are difficult for market participants to understand intensify the sense of distrust. Despite the depreciation of the yen and the rise in long-term interest rates, the Bank of Japan's interest rate hikes seem sluggish. The plan proposed by the Japanese government at the practical meeting of the cross-party "National Conference on Social Security" on the 20th to postpone the tax credit for additional payments and only issue cash in advance is also considered a neglect of fiscal issues.

Wall Street's vigilance against a further rise in Japan's long-term interest rates and the spread of bond selling globally is increasing. As losses widen due to the decline in Japanese government bonds, Japanese investors are likely to sell U.S. Treasuries and other assets in order to lock in book profits and control risks.

Generally speaking, if Japan's interest rates rise, there is no need to take exchange rate risks to buy U.S. Treasuries and other assets. It is easier for funds to flow back to Japan from the bond markets of various countries.

Financial professionals have started talking about the concept of "repatriation." The Financial Times reported on the 17th that investment firms have begun to prepare for Japanese investors to transfer funds from the U.S. Treasury market.

Actually, the U.S. Treasury Department's report on the holdings and trading trends of U.S. Treasuries in March released on May 18th showed that Japan sold $23.9 billion worth of U.S. Treasuries. Although it is unclear to what extent the capital repatriation will expand, even the strengthened expectation of selling U.S. Treasuries will inevitably have an impact.

15 years ago, when the Great East Japan Earthquake occurred, the concept of capital repatriation swept through the financial markets. At that time, unsubstantiated news spread that Japanese insurance companies and others were selling overseas assets and repatriating funds to their home country, leading to an unprecedented appreciation of the yen against the U.S. dollar.

The lesson from that time is that once the market trend changes, it is difficult to stop even if the evidence is insufficient. As policymakers, in order to prevent the market from taking advantage of the situation, they can only fulfill their responsibility to explain and continue to show it through actions.

U.S. Treasury Secretary Bezant held talks with Bank of Japan Governor Ueda Kazuo in Paris on the 19th. Bezant said in an interview with Reuters, "I'm confident that (Ueda) will implement excellent monetary policies if there is room to do what is necessary."

Taking it literally, it can be interpreted that the Bank of Japan should raise interest rates and the Japanese government should not obstruct it.

Bezant used to work in the hedge fund industry and is considered to have successfully bet on the yen depreciation trend brought about by Abenomics. His remarks should be understood as a signal of "don't let the market take advantage of the situation."

This article is from the WeChat official account "Nikkei Chinese Net" (ID: rijingzhongwenwang). Author: Ishikawa Jun. It is published by 36Kr with authorization.