DB: распродажа японских бондов проблема для Treasuries

We wrote last week that a widening gap between US Treasury yields and USD/JPY would be the single most important market indicator of accelerating US fiscal risks. The chart below speaks for itself: the JPY is strengthening even as US yields are rising. We consider this as evidence that foreign participation in the US treasury market is declining. To be sure, Japanese back-end yields have also risen strongly in recent days. Some have interpreted this as a sign of rising fiscal worries in Japan but we disagree. If this was the case the yen would be weakening and it is strengthening. As we pointed out in our global macro framework last week, Japan has plenty of fiscal space given its positive net foreign asset position (figure 2). We would argue the JGB sell-off is a bigger problem for the US treasury market: by making Japanese assets an attractive alternative for local investors, it encourages further divestment from the US.

At the core of our views in coming months is that the market is becoming increasingly driven by external asset positions, and this is putting combined downward pressure on US bond markets and the USD. A metric for how concerned the market is about twin deficits is the beta (slope) of the NIIP/yield relationship in figure 2. This effectively gives us the global market price of deficits. Plotting this over time we show that it has been in a very well defined range since the Global Financial Crisis. We would argue the risks are shifting towards a bigger steepening of the line (effectively a widening in US - RoW differentials) and a reversion to the pre-2008 regime (figure 3). As we wrote in our FX Blueprint yesterday, a weaker USD is the release valve to America's twin deficit problem.