The 10-year Treasury yield is up by 2.3 bps to 4.139% on Friday after the Bank of Japan (BOJ) raised interest rates by 25 bps to 0.75%, marking the highest level in 30 years.
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So, how does this affect the 10-year yield? In a strategy called the yen carry trade, Japanese investors are able to borrow capital domestically at near-zero rates. Next, they use the money to invest in higher-yielding assets, like U.S. Treasuries. With higher rates, Japanese investors may choose to invest in domestic government debt rather than foreign debt, which could reduce demand for 10-year notes and raise their yields.
Higher BOJ Rates May Boost Yen, Weigh on U.S. Treasuries
Rising Japanese interest rates may lift the yen, as higher domestic returns attract greater investor demand. “I don’t think we can entirely treat this as a Japan-only event,” said HSBC Chief Asia Economist Frederic Neumann.
The 10-year yield has risen by nearly 12 bps since the BOJ suggested that it would raise rates earlier this month. For context, a note’s price moves in the opposite direction as its yield.
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