The Federal Reserve’s custody holdings of Treasuries fell for the first time in a month at a time Japan was likely intervening to support its currency, with markets debating whether the nation offloaded US securities to fund its yen purchases.
The amount of marketable US Treasury securities the Fed holds for foreign official and international accounts slipped by $8.7 billion to $2.73 trillion in the week to May 6, according to data released by the central bank. Japan’s Ministry of Finance was estimated to have spent about $54.7 billion to buy its currency during the same period. The drop in the Fed’s holdings is consistent with the possibility that Japan’s intervention involved Treasury sales.
Any decline in Japan’s Treasury stockpile may put further upward pressure on US yields, which are already being driven higher by surging oil prices and concern the Iran war will widen America’s fiscal deficit. Japan is the largest foreign holder of US government debt, and supporting a deeply liquid currency such as the yen typically requires billions of dollars of intervention.
“The movement in the account seems to correlate, coincide with the MOF instructing the Bank of Japan to intervene,” said Rodrigo Catril, senior foreign-exchange strategist at National Australia Bank Ltd. in Sydney. History suggest interventions are likely to be sporadic, but “if this becomes a regular theme, then it could become an issue for the US Treasury market,” he said.
The weekly Fed data were released just days before US Treasury Secretary Scott Bessent visits Japan, where he is expected to meet with Prime Minister Sanae Takaichi, Finance Minister Satsuki Katayama and BOJ Governor Kazuo Ueda. Bessent will likely discuss recent moves in the currency market, the Nikkei newspaper reported Thursday.
The BOJ’s ability to draw on reserves held with the New York Fed allows Japan’s authorities “to carry out operations during US trading hours when Treasury market liquidity is at its peak,” said Yuxuan Tang, Asia head of rates and foreign-exchange strategy at JPMorgan Private Bank in Hong Kong. “This approach helps minimize disruptions. They also prefer to use Treasury bills rather than long-dated Treasuries for the same reason.”
The BOJ acts as the MOF’s agent to execute any foreign-exchange intervention.
The New York Fed in January requested indicative quotes on the yen exchange rate, triggering a jump in Japan’s currency. Bessent said in November that his job is to be the nation’s “top bond salesman,” and US yields are a strong barometer for measuring his success.
Past intervention episodes show no notable decline in the cash component of Japan’s foreign-exchange reserves, Shusuke Yamada, foreign-exchange and rates strategist at Bank of America in Tokyo, wrote in a research note.
“Assuming the same holds this time, this would imply a deterioration in supply-demand conditions of around $70 billion in the relevant bond markets, generally assumed to be US Treasuries,” he said.
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