It appears the recent move in the US 10-year Treasury yield from 1.2% to 1.7% had very little to do with inflation expectations.

by mark000
[March 4]

Japanese funds sold a record $34 billion of foreign bonds in the two weeks ended Feb. 26 as the nation’s fiscal year-end [on 31] March approaches — enough to cause reverberations in U.S. repurchase markets for 10-year Treasuries.

What started out as a re-balancing of books by Japanese funds has added to the volatility in global markets, with Treasury yields rocketing to levels seen before the pandemic, as a vicious cycle unfolds as selling begets more sales. The dumping from Japan, one of the biggest owners of debt, triggers hedging by dealers on the other side of the trade, which in turn impacts crucial funding markets relying on bonds as collateral.

And from “some other website that everyone loves to hate” [March 24]:

….observation was made this week by Morgan Stanley’s chief rates strategist Matthew Hornbach, who over the weekend identified the origin, if not quite the identity, of the persistent seller of Treasurys over the past few months, who has sparked such a violent rout across not just the US rates space but also stocks and other core assets.

As the following remarkable chart from Hornbach makes very clear, the cumulative downward price movement in Treasury futures has been concentrated in the Tokyo session. Furthermore, after a brief respite in the first week of March, selling in the Tokyo session accelerated dramatically ahead of the FOMC meeting and it continued afterward.

Of course, the initial burst of Treasury futures selling – which appears to have originated out of Japan every time – would then have a domino effect on the rest of the world, and as Morgan Stanley notes, “weak price action during the Tokyo session led to additional selling during the London session” although to a lesser extent. As the next chart shows, since the start of the year, 85% of the cumulative decline in TY futures prices occurred in the overnight session, i.e., Japan is almost single-handedly responsible for the dump surge in yields this year!

Why does this matter? Because if Morgan Stanley is right, and if the seemingly daily Treasury selling indeed originates out of Tokyo, there is finally good news for bond bulls: Hornbach writes that “we have good reason to believe the selling from Japan won’t last… into April.” That’s because the fiscal year in Japan ends on March 31. “At that point, liquidation of non-yen bond holdings should stop, if not reverse at some point in the April-June quarter.”


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