Yen-Hedged US Bond Yields: A Positive Turn After Years

As an investor, I've been keeping a close eye on the global bond market, and one trend that has caught my attention is the recent positive turn in yen-hedged US bond yields. For the first time since 2022, these yields have turned positive, presenting an interesting opportunity for investors. Let's dive into the reasons behind this shift and explore the implications for global markets.



The divergence in monetary policies between Japan and the United States has been a significant driver of this trend. The US Federal Reserve has been tightening its monetary policy, raising interest rates to combat inflation. This has made dollar-denominated assets, including US bonds, more attractive to investors. In contrast, the Bank of Japan (BOJ) has maintained ultra-loose monetary policy to combat deflation and support economic growth, keeping interest rates low. This divergence has led investors to favor US bonds, driving up their yields.

Market speculation and government intervention have also played a role in the yen's depreciation, which has further boosted the appeal of yen-hedged US bonds. Despite statements from Japan's top currency diplomat, Masato Kanda, indicating potential intervention to support the yen, such actions have not yet materialized. This has led investors to continue betting against the yen, anticipating further declines. The Japanese government and the BOJ have intervened in the past, but traders remain wary of further market intervention.



The carry effect of hedging yen exposure in Japanese Government Bonds (JGBs) back into US dollars has significantly contributed to the strong returns in 2023. The yen's depreciation against the dollar, which reached over 7% in the first seven months of 2023, has driven forward returns for a US dollar-based investor who sold the yen forward to hedge yen exposure in JGBs. As of July 2023, these forward returns reached an impressive +4.71%. In contrast, a US investor in US treasuries would have made a return of only +1.48% for the same period. This differential highlights the advantage of yen-hedged US bond yields, which are now positive for the first time since 2022.

As an investor, I'm keeping a close eye on this trend and considering the potential opportunities it presents. The positive turn in yen-hedged US bond yields is a result of a combination of factors, including monetary policy divergence, market speculation, and the carry effect of hedging yen exposure. While the future remains uncertain, the current situation offers an intriguing opportunity for investors to explore.