ITC Sources: GPIF Buys USDJPY & Short-End USTs Over Y108, Sells Both at Y110

6th February 2020

Japan’s Government Pension Investment Fund — the world’s largest pension fund — buys the US dollar/ yen (buy US$/sell yen) and then use those proceeds to buys short-end US Treasuries on an unhedged basis, when the US$/yen is about Y108, and then when the US$/Yen moves up to Y110, it sells both, said observers citing an ongoing practice. That would lock in a 1.85% profit on the foreign exchange side, plus some residual P&L from the USTs movement.

–“They are a big buyer in dollar/yen, and buying on the shorter end Treasuries,” said one observer. “They are not buying longer than 5-year notes. They are buying” Treasuries and dollar/yen when it’s above Y108 and selling at Y110, “that type of range,” said the observer. “They have been playing for quite some time, buying and selling, with this frequency.”

–“Because it is largely short-dated paper, the Treasuries market is not affected, but FX would be affected,” said the observer.

–The strategy would appear to be a fairly short-term tactical trading strategy though, as the USD$/yen has been in a range of Y108-Y110 over the past month, but compared to the range over the past five years, the US$/yen movements have been very muted, said ITC FX’s Adrian Thong.

— The world’s largest pension fund, GPIF had 161.8 trillion yen ($1.5 trillion) of assets under management as of December 2019. The GPIF has trimmed its Japanese Government Bond (JGB) portion of its portfolio from 65% in 2012 to 25% currently, which occurred against “large increases in both foreign bonds and equities,” said the Financial Times on Feb. 3rd.

— Japan is the largest holder of US Treasuries, surpassing China in late 2019. Jefferies economist Tom Simons noted that the November TICS’ US Treasuries holdings data showed that Japan “remained the top holder of Treasuries despite a dip in their holdings. Japan’s holdings fell $7.2 bln to a total of $1.161 Tln. Mainland China holdings fell $12.4 bln to $1.089 Trln. The decline in Chinese holdings this month follows modest declines for the majority of 2019 to-date. Chinese holdings of Treasuries are now at their lowest level since March 2017,” he added.

-By Sheila Mullan