It is no secret that the Japanese yen has been a safe-haven asset for some time now. A recent development, however, is the increase in its correlation with U.S. 10-year Treasury prices. At 0.70%, it’s currently much higher than its 15-year average of 0.47%, according to Bloomberg data.
What’s the connection between the yen and U.S. Treasuries? Interest rates are likely a key driver of recent trends, but perhaps for different reasons. Strength in the yen is often a result of what’s known as the “carry trade.” Large global investors often borrow money in more stable, developed market currencies like the yen, which has experienced negative interest rates more recently, in order to purchase higher yielding assets in emerging markets, for example. When these investors unwind their riskier positions, they must convert the foreign currency back into yen, causing it to strengthen. For Treasuries, the relatively attractive yields they offer compared to sovereign debt from other developed countries, in addition to their status as some of the safest (if not the safest) investments available, in and of itself drives demand, but it also ensures that prices are driven higher (and yields lower) when investors look for safe-haven assets to reduce risk in their portfolios.
Year to date, the price change of the yen has been a fairly accurate indicator of changes in 10-year Treasury prices, but this is just one chart and correlations do change over time. That said, if the more recent pattern holds and the yen continues to rise, the 10-year yield may continue to decline, and the price may continue to rise.
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