Inflation Isn't the Only Culprit in the Treasury Bond Selloff

The rising interest rates and selloff in Treasury bonds and related exchange traded funds may not be solely attributed to fears of higher inflation.

A contributing factor the recent sell-off in the Treasury market and rising yield environment may be associated with heavy overseas selling, such as investors in Japan locking in investment returns for their fiscal year-end, the Wall Street Journal reports.

Banks and insurers in Japan poured fuel onto the global selling in February after efforts to finalize their investment returns for their financial year ended Wednesday. For example, Dai-ichi Life Insurance Co., one of Japan’s major insurance firms, revealed it sold some U.S. Treasuries and reinvested in sovereign and corporate bonds of other currencies.

Large Japanese investors have contributed to net sales of ¥2.815 trillion, or $25.5 billion, worth of foreign bonds since February, according to Ministry of Finance data ended March 20.

Additionally, Seoul’s Kyobo Life Insurance Co. Ltd. also dumped longer-dated U.S. Treasuries, according to Matt Lee, head of overseas investments at the firm.

“There’s a high chance that U.S. interest rates will continue to rise,” Lee warned.

Market observers noted that the timing of the market moves indicated that Asian investors led the selloff in Treasuries. There was some struggle at the Treasury auction in late February, which some analysts argued was attributed to Asian investors causing a shortfall in demand.

Furthermore, Guneet Dhingra, head of U.S. rates strategy at Morgan Stanley, noted that during February, when the Treasury selloff gained momentum, most of the moves in yields came during Japanese trading hours. In recent days, yields have pulled back from their peaks during Asian trading hours too.

Dhingra argued that the Japanese selling was not driven by any fundamental concern or changes in investors’ views of the Treasury market, but rather banks looking to offset bond losses against equity gains.

“The selling was driven by Japanese banks looking to smooth the volatility of their portfolio returns for the year-end,” Dhingra told the WSJ.

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