TOKYO
The US bond market is losing a pillar of demand. Japan's 10-year government bond yield has climbed to roughly 3 percent—a level unseen since 1996—making domestic fixed income competitive for the first time in decades. For Japanese pension funds, insurers and other large investors accustomed to buying US Treasurys for yield, the calculus has shifted.
Japan holds approximately $1.1 trillion in US government debt, making it the largest foreign holder. As long-term Treasury yields approach multi-decade highs last seen in 2007, the spread between Japanese and US debt has compressed enough to tip the risk-reward equation. Japanese savers no longer need to venture abroad.
Data through June tells the story: Japan-based investors sold a net $71 billion of US government debt. Crucially, $69 billion of that came from short-term Treasury bills maturing within a year. Sales of longer-term notes and bonds totaled only $3 billion—a thin slice, but one that matters. Long-term yields directly feed mortgage rates and corporate borrowing costs.
A weaker yen compounds the pressure. Currency depreciation can force Japan to intervene by purchasing its own currency with dollars. To raise those dollars, Japan often sells Treasurys, adding supply to a market already grappling with elevated yields.
Following a joint US-Japan currency intervention on July 31, Japan signaled it would tap the Federal Reserve's Foreign and International Monetary Authorities (FIMA) repo facility to manage yen weakness without flooding the Treasury market with sales. The facility, established during the pandemic, allows foreign central banks to temporarily exchange Treasurys for cash with the Fed, providing dollar liquidity without forced selling.
Treasury Secretary Scott Bessent has pushed the Fed to expand FIMA capacity. "I think it was set up for occasions just like this," Bessent said in a recent CNBC interview. Bessent also doubled long-term Treasury buybacks last month to support the market.
The FIMA mechanism can prevent currency intervention from triggering Treasury sales. It cannot, however, make US debt more attractive when Japanese yields offer comparable returns at home.
