“Their dollar reserves are sitting in U.S. Treasury bills, making whatever returns, but they can get much more than that lending the dollars,” said Peter Stella, a Falls Church, Virginia-based consultant who spent 25 years at the International Monetary Fund, leading the central-banking and monetary and foreign-exchange-operations divisions from 2005 to 2009.
“The risk is pretty much zero to the central bank,” he said. “Providing liquidity in dollars is absolutely something central banks have been doing.”
Statistics show a burgeoning Chinese appetite for Japanese debt. Cumulative Chinese flows into Japanese bills tallied an all-time high of about 10 trillion yen ($99 billion) in June, data from Japan’s Finance Ministry show.
China’s State Administration of Foreign Exchange, which manages the nation’s reserves, started liquidating some Treasuries and buying Japanese debt after the Federal Reserve raised rates in December, according to people with knowledge of the matter. SAFE boosted holdings further in the past three months as it sold some pound assets before and after the U.K.’s June vote to leave the European Union, said the people, who requested anonymity because the information isn’t public.
SAFE didn’t respond to a fax seeking comment on the issue.
Unprecedented Distortions
The trade is just one example of how unprecedented central-bank stimulus -- from negative interest rates to bond buying -- has pushed investors into uncharted territory. Consider that Swiss debt maturing in almost 50 years yields around zero, or that Unilever, the Anglo-Dutch consumer products maker, has securities due in 2020 yielding negative 0.17 percent.
A dollar-based investor needs just a few steps to turn Japanese three-month bill returns positive.
To buy the bill, yielding negative 0.24 percent, a fund manager can borrow yen, lending dollars in return. As part of that agreement, they’d pay the three-month yen London Interbank Offered Rate -- now at about negative 0.03 percent -- and receive dollar Libor -- at 0.81 percent.
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