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Foreign buyers will continue to have a strong appetite for U. S. bonds even as Japan begins phasing out its yield curve policy, according to Goldman Sachs.
As part of a form of quantitative easing, Japan’s central bank has maintained short- and medium-term interest rates since 2016, making its safe-haven bond market less attractive to investors in recent years as interest rates have risen.
But Japan — a major client of U. S. bonds — is phasing out its yield curve program as part of an ongoing normalization of financial policy, raising concerns among investors that foreign clients could start looking to the Japanese bond market as an option for the Japanese bond market. WE.
If demand really fell, it would be because Goldman Sachs says foreigners held $4. 1 trillion in U. S. corporate bonds at the end of August, accounting for about 42% of the entire U. S. market for investment-grade and high-yield bonds.
“The market for those holdings peaked in mid-2021 at $4. 7 trillion, which is the post-COVID downside for long-term Treasury yields,” Goldman said.
But even with a strong U. S. dollar and high investment and hedging costs, foreign buyers bought $130 billion in U. S. corporate bonds in the first eight months of the year.
And despite a recent rise in Japanese yields, the 10-year US Treasury yield of 4. 68% is still more than 4 times higher than the existing 10-year Japanese yield of 0. 92%. Currently, yields are slightly below 6%, compared to just under 1% for Japanese corporate bonds.
“The intensity and breadth of U. S. credit markets, coupled with the lack of competitive domestic alternatives, will likely continue to limit net purchases overseas,” Goldman Sachs said.
Moreover, the ongoing normalization of Japan’s financial policy will be enough to drive foreign buyers away from the U. S. bond market, as many policy movers are offering other incentives to other investors.
And any promotional tension in the U. S. bond market by foreign investors is due to a confluence of other factors.
“Conceptually, a combination of a significant strengthening of the yen, a steep steepening of the JGB yield curve, and a significant compression of the yield spread with dollar bonds may simply fuel persistent promotional pressure. But the bar is remarkably high, given existing market prices. Goldman said.