China bought 1.46 trillion yen ($13.8 billion) in medium to long-term Japanese government bonds on a net basis between April and July. That was 3.6 times more than the same period last year. In the same period, the U.S. increased its purchases by only 30% and Europe, meanwhile, sold off 3 trillion yen worth of JGBs.
▪ Yields on such bonds are near zero, making them an unlikely option as an investment. But there could be other reasons why China would want to buy those bonds.
▪ China can actually earn more on the investment by buying 30-year JGBs in the Japanese yen and swapping their currency exposure back into U.S. dollars, picking up an additional 0.56%. China may also be trying to manage the appreciation of the yuan, as the Chinese currency spiked against the Japanese yen in June.
▪ Another factor is that in comparison to its global counterparts, Japanese government bonds do not have the lowest yields. JGB yields are slightly below 0%, making Japan’s bond market is more attractive than many other countries’ bonds, with Sweden, Switzerland, and core Eurozone countries all having deeply negative yields.
▪ Treasury yields globally this year have gone down as investors flocked to the safety of government bonds amid the worsening pandemic. As prices go up, yields fall as they move inversely to each other.