Driven by a sudden shift in Federal Reserve policy expectations fueled by soaring oil prices, Japanese investors executed their largest sell-off of U.S. Treasuries in nearly four years.
Balance of payments data released by Japan on Wednesday showed that, in the three months ending March 31, Japanese investors were net sellers of U.S. Treasuries, agency bonds, and local government bonds totaling 4.67 trillion yen (approximately $29.6 billion). This marks the highest net selling volume since the second quarter of 2022.
In February, the overnight index swap market indicated traders were anticipating two Fed rate cuts within the year. However, following geopolitical tensions impacting oil markets, crude prices surged by approximately 50%, stoking market expectations of rising inflation. This has led interest rate pricing to shift, with markets now pricing in the possibility of a Fed rate hike instead.
Naokazu Shimizu, a senior interest rate strategist at Nomura Securities, stated: "There has been a clear shift in market positioning. The outlook has become highly uncertain. Not only has the expected timing of rate cuts been pushed back significantly, but the next policy move could even turn to a rate hike."
The Tokyo-based strategist added: "The market had previously operated on the default assumption that the Fed would eventually begin a rate-cutting cycle, an expectation that supported fund inflows, particularly into mortgage-backed securities."
The latest data from the U.S. Treasury Department shows that in the first two months of this year, Japanese investors were net sellers of U.S. agency bonds to the tune of $4.14 billion.
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