Japan's interest rate hike signals spark concerns of "capital outflow" from the US market, raising uncertainty over the Federal Reserve's rate cut outlook

BlockBeats News, December 2, as the largest overseas holder of US Treasuries, if Japan tightens its monetary policy, it may trigger domestic funds to flow back from US Treasuries and other overseas assets, thereby interrupting the downward trend in US Treasury yields and adding uncertainty to global markets. On Monday, after Bank of Japan Governor Kazuo Ueda hinted that an interest rate hike might occur later this month, global government bond yields generally climbed (bond yields rise when prices fall). This statement surprised investors, who had expected the Bank of Japan to remain on hold. Ueda's remarks pushed the yield on Japan's 10-year government bonds up to 1.879%—the highest closing level since June 2008. The yield on the US 10-year Treasury also rose, closing at 4.095%, whereas it was just below 4% in the middle of last week.

Wall Street is concerned that the rise in Japanese bond yields will attract funds to withdraw from US investments and trigger an increase in US Treasury yields. Japan is the largest foreign creditor of the US government, holding about $1.2 trillion worth of US Treasuries as of September. The decline in US Treasury yields this year has been a driving factor for the Federal Reserve to start cutting rates again, lowering mortgage rates and boosting the stock market—stocks often benefit from lower Treasury yields because investors can no longer obtain the same level of risk-free returns simply by holding Treasuries to maturity. The signal of Japan tightening its monetary policy has also raised concerns about the prospects for Fed rate cuts, as rising US Treasury yields will become an obstacle to rate reductions.