The Treasury yield curve may flatten on expectations the Federal Reserve will delay raising interest rates as the U.S. economy risks entering a Japanese-style “lost decade,” Bank of Tokyo-Mitsubishi UFJ Ltd. said.
The U.S. may slip into a period of economic contraction similar to Japan’s during the mid 1990s to early 2000, when the Bank of Japan held interest rates near zero and conducted quantitative easing, said Kenichi Imai, chief manager of proprietary trading at the unit of Japan’s largest banking group. Ten-year Treasury yields may reach a 15-month low of 2.75 percent in the near term from 2.86 percent today, Imai said.
“For the Japanese, who have experienced a long period of stagnation and monetary easing, the current movement in Treasuries looks familiar,” Imai said. “With the effect of government stimulus measures wearing off, the U.S. economy may face a prolonged soft patch, rather than a double bottom.”
Treasury yields from five to 10 years dropped at least 90 basis points from three months ago, narrowing their premiums over shorter-dated yields, according to Bloomberg data. The difference between two- and seven-year yields was 175 basis points today, the least since May 2009.
Two-year yields were at a record low after Federal Reserve Chairman Ben S. Bernanke told the Senate Banking Committee yesterday that the economic outlook is “unusually uncertain” and policy makers are prepared “to take further policy actions.” Bernanke will testify to the House Financial Services Committee today.
Banks with excess funds may shift to higher-yielding longer-dated bonds from shorter-term debt as corporate funding demand slumps in Japan and the U.S., Imai said. Japanese demand for Treasuries may increase as Japan’s 10-year yields approach a seven-year low, according to Imai.