PNC: The probability of Japan selling mid-term US Treasuries to intervene in the foreign exchange market is extremely low; the impact on long-term US Treasury yields is limited.

PNC Head of Rate Research Isfar Munir pointed out in a research report that if the Japanese Ministry of Finance needs to raise funds for foreign exchange market intervention in the future, it is highly likely that they will not sell even medium-term US Treasury bonds, so the impact on long-term US Treasury yields is expected to be quite limited. Although last week there were signs of yen intervention in the market and 30-year US Treasury bonds were simultaneously sold off, the negative 30-year swap spread narrowed over the same period. If the current trend in long-term US Treasuries truly reflects the impact of exchange market intervention, the negative value of the swap spread should have widened further. If subsequent intervention were to affect long-term US Treasury yields, this would more likely occur via the "market expectation transmission channel." However, for this channel to work, the market would need to interpret Japan's intervention as a signal that overall demand for US Treasuries will decrease for a longer period in the future.