An increase in the number of yen-denominated bonds held by foreigners and a perceived reduction in the supply of dollars makes it more expensive to convert yen funds into the U.S. currency.
Three-month dollar-yen basis swaps fell to negative 53.5 basis points on Thursday, a level not seen since November 2023. This means that investors who used the yen to obtain dollar financing had to accept larger discounts to Japanese interest rates. Five-year swap contracts fell to the lowest level in almost two months this week.
A lack of dollars helped reduce short-term basis swaps, while rising Samurai bond issuance impacted longer-term swaps, said Shoki Omori, chief strategist at Mizuho Securities Co.
