Japan holds over $1 trillion of US Treasury securities, making it the largest sovereign holder by a significant amount. Thus, the possibility has arisen that Japan might use its extensive holdings as leverage in tariff negotiations. Japanese Foreign Minister Katsunobu Kato said Japan has not made a decision on whether to include its holdings as part of the negotiations, but he did state the following:

It does exist as a card. Whether or not we use that card is a different decision.

Given Japan’s historical purchases and strong demand at recent Treasury auctions, Japan might opt to buy more Treasuries to signal goodwill and stabilize markets. Moreover, they could codify Treasury purchase or holdings minimums into an agreement. A deal could also be structured so that Japan agrees to hold more long-term debt as a percentage of its total holdings. The problem facing Japan with any requirements is that its Treasury holdings result from its currency market interventions. If Japan wished to support the yen versus the dollar , it would need to sell Treasuries and convert the dollars to yen.

Looking ahead, Japan may not be the only country able to use Treasury holdings as leverage in negotiations with the US. A deal with Japan or another major holder, as shown below, could be instrumental in other similar deals. Such deals involving Treasuries could be a creative way for the Treasury Department to drum up demand for its bonds, thus lowering its interest expenses.

What To Watch Today

Earnings

Economy

Employment and The Week Ahead

The economy added 177k jobs last month, about 35k above estimates. However, the two prior months were revised lower by 58k jobs. The unemployment rate was unchanged at 4.2%. As judged by this report, the labor market seems in good health, albeit slowing.

This morning, ISM will release its service sector survey. Estimates are for slight economic expansion at 50.8. Traders will focus on the prices and employment components to see if tariffs impact jobs and prices. The ISM survey is a little more real-time than most federal economic data, so it may be more of a market-mover event than is typical.

The big event this week will be the Fed’s FOMC rate decision . The market seems firmly in the camp that they will not cut rates. However, a reduction or end to QT is possible given some signs that liquidity is problematic. We think the market will key in on their discussion on whether they cut rates at the June meeting.

The second graphic below, courtesy of Earnings Whispers, shows a slew of earnings announcements on the docket. However, most of the largest companies have already reported. Therefore, we suspect that earnings will have less impact from now on.

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