July 12, 2010 – Who’s Been Buying All Those Japanese Bonds?


2) Who's Been Buying All Those Japanese Bonds? International bond and foreign currency markets were stunned last week when figures were released showing that the Chinese had bought record amounts of Japanese government bonds in May. The move was no doubt the impetus behind the big rally that took Japanese ten year debt to a pitiful 1.15% yield, and triggered the break out by the yen from a six month, ¥90- ¥95 range that caught many hedge funds flat footed. The Middle Kingdom's purchases of short term yen paper soared to $8.3 billion, more than the entire first quarter. China has the enviable problem in that it has a plethora of riches. In fact, it has so much money, that there are really only three places it can go: US Treasuries, Euro denominated bonds, and JGB's. Any move out of one, necessitates purchases of the other two, and a good dose of Euroscare, no doubt, stampeded the Chinese away from that beleaguered currency into the yen. Sure they can dabble in other attractive, fundamentally strong currencies, like the Australian and Canadian dollars and Swiss francs (click here for more depth). But the floats in these lesser currencies are so small that any serious move would quickly send them through the roof. Where else can you go with $2.4 trillion? Antique postage stamps? Vintage baseball cards? Collectable Beanie Babies? (Ebay would love it!). I think not. This also explains why, no matter how dire its prospects are, some two thirds of China reserves are still parked in the dollar.