One Week Later

A week after the Bank of Japan’s 25-bps rate hike, interest rates are still heading lower. The long end of the JGB curve has been following the global market, as usual. What’s not usual, or at least shouldn’t be, Japanese bills haven’t budged, either. That’s not a positive sign and goes along with a rash of other eurodollar signals detailing deflationary difficulties in the global reserve.

US primary dealers have been piling up a record hoard of Treasury bonds and notes, including the latest data for last week reaching another all-time high. That fits with the low yields on Japanese bills and now that the rate hike is behind everyone, we can see just how low those rates are and therefore assess how much additional demand there is for these securities above and beyond nominal interest rate returns.

Even after giving them a week to potentially normalize to the new overnight rate (BoJ) of 50 bps, both the 3-month and 6-month bills have actually slipped a few more basis points after never even getting close to fifty in the first place. The slide began on the 24th, too, the day of the rate hike.

Over the week since then, the 3-month has dropped to just 32.5 bps which is a wide spread to the policy benchmark. The 6-month bill, which had gotten to 40.5 bps last Thursday, is now just 34.5 bps yesterday and today. These bear watching along with dealer Treasury holdings and a few other indications in the eurodollar catalog.

That indicated dollar tightness hasn’t pressured the yen, at least not in recent weeks unlike in December. Instead, rate differentials between longer-term bonds becoming a little more favorable are boosting JPY. It isn’t the Bank of Japan’s rate hikes, instead how LT JGBs have seen less of a dip in rates this month.

The yen has been broadly uncorrelated with short-term rates following 2022 and late 2023. The relationship even then was more about the long run bonds as what was happening in the front. Either way, the 2-year JGB/Treasury differentials has been increasingly favorable to the yen since the global bond rally started in October 2023, yet JPY tanked anyway.

While the relationship between the 10-year differentials and JPY is still there, as you can see below that doesn’t explain the degree of yen weakness the past few years, only some of the variations in it along the way.

Instead, like other currencies, the lower yen relative to the dollar is the rising dollar premium charged to the Japanese, one that’s most evident at the 10-year bond maturity. So, the question is what is driving it the past couple months; is it strictly the prospect for “trade wars” and what that might do to suppress trade more than trade has already been suppressed by a variety of negative macro and monetary factors?

Tariffs might account for some of these short run movements, but like the widening eurodollar premium which stretches back into late 2023 (when the economic inflection showed up, reflected in the global bond rally), there has to be a lot more to it.