Foreign exchange hedging costs are declining, is there a possibility for Japanese buyers to return to the US bond market?

It is noticed that following Trump's election victory, which pushed up US Treasury yields, and the Fed's rate cuts reducing hedge costs, the yield on hedged US Treasury bonds in yen will turn positive for the first time in two years. On Tuesday, the 10-year US Treasury yield hedged in yen rose to negative 13 basis points, a level that takes into account the cost of preventing a possible decline in the US dollar against the yen. Due to the Fed's rate hikes making shorting the US dollar more expensive, the hedged yield has been below zero since September 2022. The rise in US Treasury yields has sparked a debate: whether Japanese investors will return to this asset class during the Fed's easing cycle, or will they move away from this asset class due to Trump's tariff hikes and tax cut plans leading to further yield increases. Data from the US Treasury Department shows that in the first three months of this year, Japanese investors were net buyers of US Treasury bonds, but have since turned into sellers. From January to August this year, Japanese investors have sold a total of $24.4 billion worth of US Treasury bonds. Nevertheless, Asian funds have purchased over $1 billion worth of US corporate and agency bonds during this period, indicating a shift towards higher-yielding bonds to offset the still high hedge costs and currency risks. The cost borne by investors for hedging the drop in the US dollar against the yen over the past three months has decreased from a peak of 6.01% a year ago to 4.56%. Martin Whetton, Head of Financial Market Strategy at The Pacific Bank in Sydney, said, "The cost of forex hedging is still high, but if the yield becomes positive after deducting the hedging costs, this situation may change slightly. Considering that the 10-year Japanese government bond yield is around 1%, the yield is still not comparable to Japanese government bonds." Sonal Desai, Chief Investment Officer of Fixed Income at Franklin Templeton, stated, "The decline in currency hedge costs has affected the demand for Japanese investment grade securities and taxable municipal bonds, we believe this is a very interesting area. With the reduction in hedge costs, different parts of the US market will certainly become more attractive."