Look Out Below: “Godzilla Returns Next Week”

First a couple of weeks ago, and most recently a couple of days ago in “Who’s Behind The Treasury Rally?,” we noted that while there are surely multiple factors at play including the unwind of the spec 10Y short…

Shorts

…and general concerns about the viability of the reflation narrative…

10Yannotatedapril

…one possible tailwind for Treasurys is renewed interest from Japanese buyers lured by decreased hedging costs and a favorable FX environment.

As it turns out, BofAML agrees with that assessment and as the bank pointed out in a recent note, “Japan private investments in foreign bonds finally printed positive in March as a result of the $9bn purchase in the last week.”

JapanUSTs

(BofAML)

You’ll also recall that Treasury dumping by Japanese investors made the news repeatedly over the last several months.

Flows

Ok. Well, as this morning’s disappointing CPI data quite clearly demonstrates, Treasurys probably don’t need any more excuses to rally, but as Deutsche Bank points out, they’re going to get one anyway with “the return of Godzilla.” More below…

Via Deutsche Bank

Godzilla Returns Next Week

Japanese investors bought $9.8bn non-yen bonds in the week ended 3/31, and sold $19.7bn in the week ended 4/7, according to MOF data. This large swing is not untypical and is likely owed to Japanese fiscal year-end management. Similar seasonal flows have occurred in past years around this time.

Looking ahead, Japanese buying typically picks up strongly in mid April, takes a brief pause in June and in early October, then continues full steam into Q4. Between 2002 and 2016, total purchases from April 15 to December 31 have averaged $90bn (measured at historical exchange rates). Last year, purchases were especially strong, cumulating $145bn April through December and $202bn for the full year. A steady pace of inflows from Japan starting next week should provide a mildly bullish factor for rates.

Japan

Yes, a “mildly bullish factor for rates.”

Of course when you throw in all the other “bullish factors for rates,” the outlook becomes a little more than “mildly” bullish. One might even say that when it comes to 10Y yields, it’s “look out below.”

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