headlines went out all across the financial media last night as a major Japanese Bank announced plans to sell tens of billions in U.S. treasuries and other assorted European government bonds. Plus, they plan to book enormous losses in the process. Are we seeing the start of another bank run? Will other Japanese Banks be forced to follow suit? Should we be worried about a cascading effect on the treasury market with so much selling from one of Treasury's biggest class of overseas holders? There's quite a bit to go over in order to understand what Noren Chen is up to. Why and what's not happening in the Government Bond Market. The bank is selling bonds to quote stem losses, but nobody's explaining just what that means, leaving everyone to think it has something to do with the price of the bonds being sold. Losses on what? It's not quite what you'd think. So, let's start with what Noren Chen bank actually is. It is a Cooperative of members in the Japanese farming and fishing industries, primarily about 5600.

different associations. It describes itself in this way: The mission of Narin Chin Bank is to fully support Japan's agricultural, fisheries, and forestry industries as the national-level organization of Ja Bank Group, JF Marine Bank Group, and J Forest Group. Through this support, the bank contributes to the development of food production and consumption and a better quality of life for the people living in local communities. That doesn't really tell us a whole lot about what the bank actually is or what it does. It is, in fact, a perfect example of a Yen carry trader. As the statement continues, Securing stable profits through global investments as one of Japan's leading institutional investors is an important activity that we undertake to fulfill our mission. Indeed, that's the case. In fact, Narin Chaen is an enormous carry trade, an enormous financial institution itself. It has about $800 billion in total assets, of which $400 billion is in its investment portfolio, largely devoted to overseas and international investments. It is, as I said, a perfect example of a Yen carry

Trader, and contrary to most popular imagination, the Yen carry trade is really Japanese financial institutions who have tons of Yen financing and Yen collateral but little opportunity to take advantage of that in Japan. They don't want to invest in the local economy, what should be for obvious reasons, and the only alternative are high-grade corporate bonds or Japanese government bonds, which they don't offer nearly enough return. So what they do is offer their Yen financing and Yen Yen resources and liabilities as collateral to swap into US dollars, either to buy US treasuries outright or to then swap into another currency using the euro dollar system to intermediate through the financial system and buy some higher yielding government bonds in say Europe or somewhere else around the planet. Not always government bonds, but mostly government bonds, which then of course raises a whole bunch of questions over what's happened in the last couple years in the Government Bond Market, which gets people thinking that this has something to do with the price of treasuries or underwater treasuries that are that so.

many paper losses that are forcing the bank to do things that it doesn't necessarily want to do. But this isn't about the price of treasuries, except as the byproduct of a change in strategy. As a Yen carry Trader, the paramount focus has to be on funding costs, swapping into US dollars, therefore intermediate into the other Investments. That's what this is entirely about. But before we get into that, we need to back up a little bit and understand where the bank has been coming from, because this didn't just start last night. Last night was the latest in a string of events and developments that have been moving in this direction for quite some time. So let's go back to May 21st, just a month ago, when the bank announced its review of annual results from last year. They started to talk a little bit more about how they were going to have to change strategies. And in doing so, they said, We're going to take some losses, and we're going to need some Equity from our members.

members were not not happy about that, but essentially we need to do something because it's not working what we're doing. What they said last month Narin chaen Japan's Premier agricultural bank, and one of the nation's largest institutional investors, plans to raise 1.2 trillion yen, roughly the equivalent of 7.7 billion of capital, and reshuffle its overseas Investment Portfolio after losses on its Bond Holdings swelled. The bank's paper losses rose to 2.2 trillion yen as of the end of March 2024 compared with 1.7 trillion yen a year earlier. It said in a statement the company expects a loss of at least 500 billion yen this fiscal year. And so, this article makes it seem like this is all about the underwater assets on its balance sheet, the unrealized paper losses that it's been holding in its portfolio, but that's not the case. That's not what's driving this decision, nor is it what's driving this major shift in the portfolio. It's not about the paper

losses on treasuries. They just have to sell the treasuries because they're not yielding enough return. And so what the bank is going to do and what they announced last night is a pretty radical shift, but not because they think that the US inflation is going to become tremendously inflationary or the Fed's going to continue to hike rates into the foreseeable future. This is about the fact they been forced into a negative carry position. Okay, what they announced last night was this: Narichi Kin Bank plans to sell roughly 10 trillion yen, about $63 billion. There's all your headlines in US and European Sovereign bonds to quote stem losses from wrong-way bets on interest rates, according to a spokesperson for the Japanese Agricultural Bank. The bond sales, amounting to almost a sixth of the bank's Global portfolio, will take place by the end of March. The bank said the lender now expects to report a net loss of 1.5 trillion yen for the current fiscal year, triple the previous estimate.

from last month, which was just 500 billion yen, the spokesman said, confirming an earlier n report. But again, this is not about the losses on treasuries. They have to sell their treasuries because they're not generating enough of a return in any carry trade position or any carry trade. U idea strategy. You have to, you have to pay something to borrow into the currency that you're trading into. In this case, US dollars. So you have to pay, uh, you have to pay to borrow US Dollars, and then you're hoping to generate more return to make it worth the while. And while US Dollar carry trade costs and swap costs were low, it was easy to own US treasuries because even though they didn't yield all that much, the swap costs were low enough to make it worth the while to borrow US dollars, pay, pay for those US dollars, pay for that US dollar funding, and then receive treasury coupons well above that level. But over the last couple years, that has changed to the point that the norin chikin bank.

and a lot of Japanese banks have been forced into a negative carry position, which is where the swap costs are now higher than the returns they're generating on their other assets. That's the losses that they need to stem, not changes in treasury prices, because they could just hold on to the treasuries to maturity and get paid in full. What they're where they're generating losses and where they have to really have to make a difference is in the Yen carry, the negative carry that they've been forced into because of the inverted yield curve. Longer-term treasuries that are the curve sloping downward, longer-term treasuries yield less than short-term funding cost, which is largely what these swap costs are based upon, which means they're paying more to get US Dollars than they're receiving from the treasury coupons in return. And you can see this in the in that presentation from last month, the annual review for 2023. If you go to slide number eight, what you see is, well, first of all, you see a lot of numbers in charts.

that at first make no sense sents but they show you how much their carry trade costs have gone way up. How much it cost them to acquire dollars and swap into and swap into US dollars in order to fund their positions in US treasuries or European government bonds. And in the cases like this, the strategy that Narin chikin is pursuing um, basically the cost of swapping is tied to the short-term money rates like suur. The longer they stick with this negative carry trade, the more the negative carry losses are going to pile up, that's what they're saying. And so what they have to do is find some assets that generate a a higher return, but in order to do that, they have to sell the assets they have today. And in order to sell the assets they have today, which are underwater, they're going to have to book some make paper Lawes into real losses, which is what they're saying. We're going to sell our US treasuries because the US treasuries don't generate enough of a return in this environment.

and we're going to take J. Powell at his word that he's going to hold short-term rates at a for at the level that they're at for for quite a bit longer, which means this negative carry situation is going to go on longer than the bank was anticipating. So while longer-term treasury yields go down and that helps with prices, it doesn't help with generating returns, and it leaves the bank exposed to generating losses from what should be a a extremely profitable low-risk strategy. So the higher the longer the higher funding costs persist, and the longer you think they're going to persist, the more it's going to generate losses, the more you have to do something about it, and to do something about it requires selling U.S. treasuries, not because they're making a statement about U.S. treasuries, because that's the asset that doesn't generate enough return, that's it. And so as they sell their U.S. treasuries, what happens next? Where are they going to go after that? Well, the bank has already somewhat hinted that

it's going to be rolling into riskier securities, not out of US dollars, US dollar assets entirely, but more than likely what they've already been doing, and what a lot of other Japanese banks have been doing, rolling into CLOs in corporate credit. The relentless spread compression that we've seen in corporate credit is likely due to this carry trade gone negative, this negative carry trade from Japanese financial institutions' perspective, and they've been doing this for quite some time, all the way back last year, last April. Bloomberg reported Japanese banks, in particular, were buying up entire issues of CLOs. Here's what Bloomberg said in April of 2023: Deal makers and US collateralized loan obligations are counting more than ever on an old friend: Japanese Banks. And a sign of how Japan's influence has grown: its Regional banks have become a go-to buyer in the $1.3 trillion Market, an important source of financing for Junk-rated US companies along with bigger lenders and insurers. Their loyalty to CLOs is a lifeline as some US

buyers pull back, which should have been a clue in Sursum Tomo life insurance companies considering buying more of the Securities. Norinchin bank has resumed looking at CL's after stepping away last year, and Regional banks have been teaming up to take entire top-rated portions of some offerings, according to people with knowledge of the matter. So, Narinchaen is reaching for yield as they get squeezed in their carry trade. They need to generate more profit; they're going to take on more risk. More risk means a higher return, at least it did last year. But spreads are compressing, which means nominal rates are coming down on even riskier Securities, which means they're going to be taken out a whole lot more risk in order to try to maintain a positive carry or to generate a positive carry to get away from the negative one that they've been forced into with US and European government bonds. You can see where this can potentially go wrong in a number of different ways, but that's not the issue for today. That's something.

that the bank and the entire system is going to have to worry about tomorrow, especially if the US starts tipping into recession or tipping further into recession as we continue to get signals on that. So, this brings up a whole bunch of questions about Norinchukin Bank as well as Japanese firms as a whole. How many Japanese firms are going to be out there selling more US treasuries? That's one thing. And how much of an impact is this going to have, and how much risk are they really taking on? How much risk do they know they're really taking on by rolling, by reaching for yield, and rolling into riskier corporate credits, especially if you assume the US economy's a okay with its strong labor market, and then it turns out the US economy is not a okay and the labor market is actually cracking, which is leading to a consumer retrenchment causing further recessionary problems. Corporate credit, especially risky corporate credit, can become real risky and illiquid real fast in that type of environment, so it might

be Japanese banks are being pushed out of the frying pan and jumping right into the fire. One reason why is because Narin chaen, like a lot of Japanese Banks, is funded heavily in wholesale and short-term markets. Again using the same annual presentation, what you see is they have 5.2% of their liabilities in unsecured CDs and call money and things like that. I mean, that's an enormous amount, especially for a Bank that doesn't have the greatest reputation lately. 5.7% in other liabilities, which are largely acceptances and a couple other esoteric forms, but 18.8% as other funding, which is likely repo and other forms of sfts. So they are heavily leveraged in financing markets and short-term financing markets. At the same time, they're going to be undertaking a pretty risky transformation from government bonds to Clos and using the same wholesale short-term funding to do so, which is likely why you go back to last December. December 1st, the Federal Reserve quietly reported that Narin

chikin bank had been accepted as a counterparty in its standing repo facility. Well not Narin chin Bank, its New York branch, is now one of the only 25 counterparties that are approved to use the FED standing repo facility. It's likely that the bank decided that it was going to need to head in that direction, undertake this portfolio transformation anyway, and thinking that this could become really dicey really quickly. They needed to ensure that they had some form of US dollar backstop, and so they applied to and got approved for being a counterparty with the with FB and Y standing repo facility, likely out of an abundance of caution, knowing full well that they're going to be generating losses from their from the Government Bond sales as well as using it rolling into riskier Securities that might be a little bit more problematic in wholesale and short-term funding markets as collateral. But as far as the treasury market as a whole goals, we've seen this before. The fact that Japanese Bank One Japanese bank or many Japanese banks are

selling treasuries hasn't really bothered the treasury market all that much all this time because treasuries and interest rates are fundamental. It's not about the classes of buyers or the Federal Reserve or qt or any of these things there for every seller every time the Japanese bank will sell lots of treasuries there's a buyer on the other side. In fact, there's a lot of buyers on the other side because interest rates are fundamental something that we're going to talk about in our webinar on June 28th, Friday, June 28th at 6:30 p.m. We're actually going to talk about why interest rates are fundamental and what all of this stuff means because we've been hearing forever that the treasury market should blow up. I mean you've got the out of control government deficits which we'll talk about in just a second here now you've got the biggest one of the biggest classes of overseas treasury holders actively selling their us treasuries and it's not just nin chaen

we have lots of data that suggests other Japanese firms have been doing the same thing for the last couple of years and for the same reason. But we've been hearing this for many years. Go back to 2018, for example. In 2018, right at the start of 2018, here's an article from The Wall Street Journal that said Japanese are selling US bonds over budget dollar fears. That was February of 2018. It was all largely the same factors that we hear today: fears of budget deficits. Remember the tax cut and jobs act had just passed back then, rate hikes from the FED, swap costs were rising at the same time too, and Japanese Banks sold tons of treasuries and treasury market never blew up. Same thing in 2022, similar situation, similar setup. You see that in 2022, rising currency hedging cost, the prospect of Fed rate hikes, more huge government deficit. Japanese firms began selling their treasuries a couple of years ago and as we've seen them continue to sell their.

treasuries and roll into US corporate debt. The US Treasury Market has not blown up. Interest rates have gone up, but that's solely a product of the Federal Reserve's rate hikes, which is why the curve is inverted, and why this year we continue to see rates want to go down whenever they think whenever the market thinks the FED will finally get out of the way. Japanese selling doesn't matter, nor does Government Bond issuance, and this is sadly the truth. It wish it was different, but the treasury market doesn't really care all that much about the federal government's reckless fiscal spending, and we got a reminder of that just yesterday when the CBO put out its projections for this year's fiscal deficit that were suddenly $400 billion more than they had estimated just what four months ago back in February. The major drivers of the change include higher cost from supplemental spending package signed in April that provides military aid to Ukraine and Israel, higher than estimated cost of reducing student loan borrowing balances because

politicians love to buy votes, increase Medicaid spending, and higher spending on FDIC insurance after the agency has not yet recovered payments it made after the banking crises of 2023 and 2024. And that's a separate topic we should talk about at some point. Anyway, but we put all of this together. The Japanese Bank Narin chikin bank is pursuing a carry trade strategy, which has left it in a position negative carry trade where is generating losses because the funding costs are higher than the returns it generates on the assets it holds. That's the losses. Those are the losses. That's what it's talking about. It's not about the treasuries being underwater or falling further in value. It's about the negative carry trade. They need to stop it. They need to stop the losses on their funding cost being more than their returns. So that necessitates them selling US treasuries, which then leads us into the discussion about the Treasury Market because Narin bank is not the

only Japanese firm in the same situation, and we already know they've been selling treasuries too. And despite them selling treasuries, and despite the fact that they're going to sell more treasuries, the treasury market doesn't care, is Shrugged rates continue to go down because it's not about these groups of buyers or the government as a seller. The market knows that the deficit and what the projections are, the market knows the Japanese firms have been selling, and yet rates are going down anyway. You have to ask yourself why, given all of this, how can this possibly be, and the answer is interest rates are fundamental, that's what everyone gets wrong, starting with J Powell, the Bank of Japan pioneering another Central Bank First, this time intentionally hiking rates during a recession, talked about that in the video link below. As always, thank you very much for joining me, check out our webinar Link in the description. Thank you very much to yal University members and subscribers, and until next time, take care.

MAJOR Bank Makes Announcement to Sell Billions in Treasuries

Monetary science reborn. Rediscovering the principles of currency. Putting central banks where they belong. Welcome to Eurodollar University, your place for all things modern money and monetary science. The YouTube channel for Jeff Snider, from here you can begin to investigate all the ways in which the global monetary system impacts you: economy, politics, investments and more.