Japan’s biggest bond investors see increasing parallels between the nation’s government debt market and Treasuries, indicating that historically low yields in the U.S. have room to fall.
Just as in Japan, deposits at U.S. banks exceed loans, reaching a record $1.45 trillion last month, Federal Reserve data show. As recently as 2008, there were more loans than deposits. The gap is also at an all-time high in Japan, where banks use the money to buy bonds, helping keep yields the lowest in the world even though the country has more debt outstanding than America and a lower credit rating.
While none of the more than 40 economists surveyed by Bloomberg expect the U.S. will see two decades of stagnation like Japan, they are paring growth estimates as unemployment remains above 9 percent and the housing market struggles to recover. The International Monetary Fund cut its forecast for U.S. growth in 2011 for the second time in two months on June 17, bolstering the appeal of fixed-income assets.
“I’ve seen what happened in Japan, so when looking at the U.S. now, I think, ‘Ah, the same thing is going on,’” said Akira Takei, the Tokyo-based general manager of the international fixed-income investment department at Mizuho Asset Management Co., which oversees about $41 billion.
In the decade before credit markets seized up in 2008, U.S. deposits exceeded loans by an average of about $100 billion, Fed data show. The worst recession since the 1930s led consumers to trim household debt to $13.3 trillion from the peak of $13.9 trillion in 2008, and increase savings to 4.9 percent of incomes from 1.7 percent in 2007, Fed and government data show.
Banks pared lending amid more than $2 trillion in losses and writedowns, according to data compiled by Bloomberg. Instead of making loans, financial institutions have put more cash into Treasuries and government-related debt, boosting holdings to $1.68 trillion from $1.08 trillion in early 2008, Fed data show.
Yields on 10-year Treasuries -- the benchmark for everything from corporate bonds to mortgage rates -- have fallen to less than 3 percent from the average of 6.79 percent over the past 30 years even though the amount of marketable U.S. government debt outstanding has risen to $9.26 trillion from $4.34 trillion in 2007, Treasury Department data show.
Ten-year yields fell 2.5 basis points, or 0.025 percentage point, last week to 2.94 percent in New York, the fifth straight weekly decline, according to Bloomberg Bond Trader prices. The price of the 3.125 percent security due in May 2021 rose 7/32, or $2.19 per $1,000 face amount, to 101 17/32.
Loans dropped and savings rose in Japan, too. Lending has declined 27 percent from the peak in March 1996, while bank holdings of government debt surged more than fivefold to a record 158.8 trillion yen ($1.98 trillion) in April, according to the Bank of Japan. The difference in deposits and loans, known domestically as the yotai gap, is 165 trillion yen, or more than Spain’s annual economic output.
Yields on Japanese bonds due in 10 years dropped to 1.115 percent last week from 3.46 percent in 1996 and have remained at about 2 percent or lower since 2000. U.S. 10-year yields rose one basis point to 2.95 percent at 2:01 p.m. in New York, while similar maturity Japanese yields were little changed at 1.13 percent.
The U.S. and Japan are “beginning to look similar because of the fact that we’ve had very low interest rates for a very long time now” Charles Comiskey, the head of Treasury trading at Bank of Nova Scotia in New York, said in an interview. “This is going to be 10 years of pain to de-lever ourselves from the mess of a debt-ridden society that we’ve become.”
Futures traded on the Chicago Board of Exchange indicated in January that the Fed would raise its target rate for overnight loans between banks from a record low of zero to 0.25 percent in 2011. After reports this month showed that the jobless rate rose back above 9 percent, consumer confidence fell, the housing market weakened and manufacturing slowed, traders now see no increase until late 2012 at the earliest.
The IMF said the U.S. economy will grow 2.5 percent this year and 2.7 percent in 2012, down from the 2.8 percent and 2.9 percent projected in April.
Further declines in Treasury yields may be limited because the inflation rate is higher than in Japan, where consumer price changes have been mostly negative since 2000.
U.S. prices rose 3.6 percent in May from a year earlier, according to the Labor Department. That means 10-year Treasuries yield 62 basis points less than the inflation rate. So-called real yields in Japan, where consumer prices rose 0.3 percent in April, are a positive 82 basis points.
“Treasury bonds at the current valuation would likely disappoint long-term investors with low or even negative real returns,” Tomoya Masanao, the head of portfolio management for Japan at Pacific Investment Management Co., wrote in an e-mail to Bloomberg News. “The global economy seems more tilted to inflation than deflation over the next three to five years.”
Pimco, based in Newport Beach, California, had $1.28 trillion under management as of March 31, including the world’s biggest bond fund, the Total Return Fund. Bill Gross, the firm’s co-chief investment officer, has said mortgages, corporate bonds and sovereign debt of nations such as Canada are more attractive.
The median estimate of more than 50 economists and strategists surveyed by Bloomberg is for 10-year Treasury yields to rise to 4 percent over the next 12 months.
Weak Housing Market
Those forecasts fail to take into account the weak U.S. housing market, which makes up the bulk of Americans’ net worth, according to Akio Kato, the team leader for Japanese debt in Tokyo at Kokusai Asset Management Co., which runs the $31.1 billion Global Sovereign Open fund.
“U.S. home prices won’t rebound unless household debt” is reduced, Kato said. “As long as the situation remains the same, bank lending won’t grow. U.S. banks will tighten criteria for borrowers.”
House prices in 20 U.S. cities are 14 percent below the average of the past decade, according to the S&P/Case-Shiller index of property values. The gauge dropped in March to the lowest level since 2003. Japan’s land prices are still at less than half the level of two decades ago.
Japan has endured two decades of economic stagnation with nominal gross domestic product about the same as it was in 1991. Government debt is projected to reach 219 percent of GDP next year, the Organization for Economic Cooperation and Development estimates. That compares with about 59 percent in the U.S., government data show.
The economy has struggled to recover even though the BOJ buys government securities monthly to lower borrowing costs and stimulate the economy. The efforts have been nullified as banks use BOJ funds to buy bonds rather than lend.
“With no prospects for Japan’s economic growth, funds from the widening loan-deposit gap flow to bonds rather than stocks,” said Katsutoshi Inadome, a strategist in Tokyo at Mitsubishi UFJ Morgan Stanley Securities Co., a unit of the nation’s largest listed-bank.
That’s similar to the U.S., where economists are cutting growth forecasts even though the Fed has pumped almost $600 billion into the financial system since November by purchasing Treasuries under a policy known as quantitative easing. The program is due to end this week.
Mizuho’s Takei said there is a “very high chance” that lenders will continue to funnel deposits to the bond market, helping to push Treasury 10-year yields toward 2.4 percent within a few months. Takei said he favors longer-maturity securities.
“Eventually, yields in Japan and the U.S. will converge,” said Mizuho’s Takei. “This is just the beginning.”
To contact the editor responsible for this story: Rocky Swift at email@example.com