Japanese investors sold ¥3.924 trillion worth of US bonds in February
That's the largest amount sold on record, based on data by Japan's Ministry of Finance.
This was also reported two months back here. And February's sale represents the fifth straight month of selling by Japanese investors.
So, where are these funds going to? Data shows that the most of it are actually moving into euro-denominated bonds, as Japanese investors snapped up ¥1.059 trillion worth in the same month.
While the move may have some part to do with the dollar, it also makes sense from a hedging perspective.
The cost of hedging currency risk for a Japanese investor in US bonds is related to the cross-currency basis between the two currencies, and while that has narrowed (lowering the cost to hedge) the actual cost hasn't because of the rise in the Libor.
In fact, the rise in Libor exceeds the narrowing of the cross-currency basis swap which makes it more expensive for investors to partake in the gains offered by US bond yields while staying hedged from a currency perspective.
