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By Gertrude Chavez-Dreyfuss
NEW YORK, May 16 (Reuters) - Japan's holdings of Treasuries in March fell to their lowest level in more than two years as a sharp depreciation of the yen against the dollar encouraged Japanese investors to sell U.S. assets to take advantage of the favorable exchange rate for their fiscal year-end.
Japanese holdings fell by $74 billion to $1.232 trillion in March, the lowest level since January 2020, data from the U.S. Treasury department showed on Monday. Japan, however, remained the largest non-U.S. holder of Treasuries.
"It's nearly three times the largest sales of Japanese accounts on record, and enormous doesn't even begin to give it justice," said Gennadiy Goldberg, senior rates strategist, at TD Securities in New York.
"The yen depreciated significantly in March which allowed Japanese investors to sell Treasuries at more advantageous levels going into their fiscal year-end in March. They booked profits and brought money home and these repatriation flows by Japanese investors were done at unprecedented levels."
The yen fell 5.5% against the U.S. dollar in March.
Overall, foreign holdings of Treasuries fell to their lowest since September, to $7.613 trillion, down from $7.710 trillion in February.
China, the second largest holder of Treasuries, also saw its holdings decline during the month to $1.039 trillion, the lowest since December 2018.
On a transaction basis, net new foreign inflows to Treasuries eased to $48.795 billion in March, from $75.33 billion the previous month. Treasuries have posted inflows for five straight months.
U.S. benchmark 10-year Treasury yields started March with a yield of 1.7156%, and rose nearly 63 basis points to 2.3452% by the end of the month.
The Federal Reserve, at its policy meeting in March, raised benchmark interest rates by a quarter of a percentage point. It then lifted rates by 50 bps in May and is on course to tighten rates by the same magnitude at the next two policy meetings.
The Fed actions propelled U.S. yields higher.
In other asset classes, corporate bonds, posted inflows in of $33.38 billion, the largest since March 2021, from inflows of $20.3 billion in February, data showed.
Foreigners, however, sold U.S. equities in March amounting to $94.338 billion, the largest outflow since at least January 1978, when the Treasury Department started keeping track of this data.
Foreign investors sold stocks as the Fed signaled a more aggressive pace of tightening to curb soaring inflation. (Reporting by Gertrude Chavez-Dreyfuss; Editing by Chris Reese and Richard Pullin)