Japan investors are in dilemma over American bonds as hedging costs bite
Japanese investors might soon be forced out of their American debt investments because currency hedging costs edge up on the prospect of higher interest rates as well as tougher American money market regulations.
With returns on American Treasuries dropping to about 0% after deducting hedging costs, some investors have rejected American bonds and got back to the domestic bond market.
Japan's conservative fund managers got down to higher-yielding foreign bonds, especially Treasuries, earlier this year after the BOJ stunned markets with its negative interest rate policy to help to revive the national economy.
At least one big Japanese institutional investor turns to have already switched back to domestic bonds the previous month. It’s because greenback hedging costs have become quite expensive.
By the way, some traders are also foregoing currency hedging for the purpose of boosting returns.