Most-Accurate Forecasters See 10-Year Bond Yields Below 1%: Japan Credit

Primary dealers who correctly predicted Japan’s benchmark bond yields would slide toward 1 percent in the third quarter say the rates will end the year below that level as the economic recovery stalls.

Ten-year yields will finish 2011 at 0.95 percent or less, according to JPMorgan Chase & Co., Barclays Capital and Tokai Tokyo Securities Co., the three most-accurate forecasters for the third quarter in a Bloomberg News survey conducted in June. The median estimate of 23 primary dealers surveyed last week indicates that rates may rise to 1.1 percent.

The nation’s bonds gained for a seventh month in September, the longest streak since May 2003, as Japan’s economy struggled to rebound from a record earthquake, the U.S. recovery faltered and Europe’s debt crisis intensified. Ten-year yields fell 11 basis points, or 0.11 percentage point, last quarter, outpaced by declines of more than 1 percentage point for the benchmark debt of the U.S. and Germany.

“Globally, policy makers are running out of fiscal and monetary policy options aimed to spur growth,” said Takafumi Yamawaki, the chief rate strategist in Tokyo at JPMorgan, who forecasts the yields will be at 0.85 percent in December. “Europe’s debt issue is looking worse, and tension will increase heading into the year-end. Japan’s yields will catch up with the decline in U.S. and European rates.”

Japan’s 10-year yields slid to 1.02 percent last quarter from 1.13 percent three months earlier. Sixteen strategists in Bloomberg’s June survey forecast the rate would end the third quarter at between 1.2 percent and 1.4 percent, while two predicted a decline to 0.9 percent.

Corporate Sentiment

The yield was at 0.995 percent as of 1:39 p.m. in Tokyo, the second lowest among developed bond markets tracked by Bloomberg after Switzerland’s. Japan’s benchmark yield slid to 0.965 percent on Sept. 22, the least since Nov. 9.

Japanese government debt returned 1.7 percent this year, Bank of America Merrill Lynch data shows. The Nikkei 225 Stock Average has lost 18 percent in the same period.

Sentiment among the country’s largest manufacturers remains worse than before the March earthquake that triggered an economic contraction. The Bank of Japan’s quarterly Tankan index released yesterday showed that sentiment was at 2 in September, from 6 before the disaster. A positive number means optimists outnumber pessimists.

Large companies said they based their business plans on the yen averaging 81.15 per dollar in the year ending March 31, according to the Tankan report. The yen rose to a postwar record of 75.95 in August and traded at 76.70 today.

‘Main Themes’

Concern that Greece will default on its debt and the U.S. may enter another recession is weighing on corporate confidence. The Federal Reserve last month announced a plan to sell shorter- maturity debt and buy longer-dated bonds to spur the economy through lower borrowing costs. Ten-year Treasury yields sank to a record 1.6714 percent on Sept. 23.

“Europe’s debt problems and a U.S. economic slowdown will continue to be the main themes for Japan’s bonds,” said Chotaro Morita, chief rates strategist in Tokyo at Barclays Capital. “If yields fall overseas, Japan’s rates are likely try below 0.9 percent.”

Prime Minister Yoshihiko Noda said on Sept. 15 that gross domestic product will grow 2.5 percent or more in the year starting April 2012 as reconstruction efforts buoy the economy. Japan’s GDP shrank in the three quarters through June.

“There will be a rebound in bond yields,” said Kenro Kawano, head of Japan interest-rate strategy at Credit Suisse Group AG in Tokyo. “Excessive pessimism has caused fund flows that diverged from the actual economic situation, and policy actions will be a trigger that corrects it.”

Bond Issuance

Kawano is one of seven primary dealers in Bloomberg’s September survey who said that yields will rise to at least 1.2 percent by the end of December. The median estimate of those polled indicated yields will be at 1.15 percent in March 2012.

Noda’s ruling Democratic Party of Japan last week agreed to spend about 12 trillion yen ($156 billion) for rebuilding from the March disaster on top of 6 trillion yen in measures already announced. While the DPJ plans to defer the expense through tax increases and the sale of the government’s stake in Japan Tobacco Inc., expectations remain that bond issuance will need to expand to cover the bill.

“The government will increase issuance of bonds,” said Akihiko Inoue, chief strategist in Tokyo at Mizuho Investors Securities Co., who projects 10-year yields will rise to 1.2 percent by the end of the year. “Everybody keeps their eyes closed to it, but once bonds start to be sold, positive catalysts for them will be completely ignored.”

BOJ Easing

Elsewhere in Japan’s credit markets, the Markit iTraxx Japan Index of credit-default swaps for 50 companies rose to 209.25 basis points yesterday, the highest close since July 2009, according to data provider CMA, which is owned by CME Group Inc. and compiles prices quoted by dealers in the privately negotiated market. The gauge is a benchmark for protecting bonds against default.

Default swaps protecting Japanese government debt for five years were at 148.89 basis points, according to CMA prices in New York, compared with 117.80 for German bunds and 52.27 for U.S. Treasuries.

The Bank of Japan is likely to keep monetary easing in place to assist in the recovery, with economists in a separate Bloomberg survey forecasting the central bank will hold its key interest rate near zero throughout next year. The BOJ has a 4 trillion yen fund dedicated to purchasing government bonds maturing in two years or less.

“If the government increases issuance of bonds with a maturity of two or five years, they will be absorbed in the market with little difficulty,” said Akitsugu Bandou, a senior economist in Tokyo at Okasan Securities Co. BOJ easing measures will help keep yields on shorter-term debt low, said Bandou, who forecasts 10-year yields will finish 2011 at 1.1 percent.

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Company                 Strategist             12/2011    3/2012
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BofA Merrill Lynch      Shogo Fujita           0.8%       1.15%
Barclays Capital        Chotaro Morita         0.9%       1.1%
BNP Paribas             Tomohisa Fujiki        0.9%       1.0%
Citigroup               Eiji Dohke             1.2%       1.2%
Credit Agricole         Takahiro Sekido        1.1%       1.0%
Credit Suisse           Kenro Kawano           1.3%       1.25%
Daiwa Capital Markets   Koichi Ono             1.25%      1.35%
Deutsche Securities     Makoto Yamashita       0.9%       1.0%
Goldman Sachs           Francesco Garzarelli   1.3%       1.3%
JPMorgan                Takafumi Yamawaki      0.85%      0.9%
Mitsubishi UFJ MS       Jun Ishii              1.15%      1.2%
Morgan Stanley MUFG Sec Nhan Ngoc Le           1.2%       1.2%
Mizuho Corporate Bank   Atsushi Arai           0.9%       1.1%
Mizuho Investors Sec    Akihiko Inoue          1.2%       1.2%
Mizuho Securities       Tetsuya Miura          1.1%       1.1%
Nomura Securities       Naka Matsuzawa         1.0%       1.15%
Okasan Securities       Akitsugu Bandou        1.1%       1.15%
RBS Securities          Akito Fukunaga         1.05%      0.9%
SMBC Nikko Securities   Shinji Nomura          1.1%       1.2%
Societe Generale        Christian Carrillo     0.9%       1.0%
Sumitomo Mitsui Banking Daisuke Uno            0.9%       0.9%
Tokai Tokyo Securities  Kazuhiko Sano          0.95%      1.0%
UBS Securities          Atsushi Ito            1.2%       1.3%
---
Median:                                        1.1%       1.15%
Average:                                       1.054%     1.115%
Respondents: 23
Primary dealers that didn’t provide forecasts:
Mizuho Bank
Bank of Tokyo-Mitsubishi UFJ
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To contact the reporters on this story: Monami Yui in Tokyo at myui1@bloomberg.net; Masaki Kondo in Singapore at mkondo3@bloomberg.net; Yumi Ikeda in Tokyo at yikeda4@bloomberg.net

To contact the editor responsible for this story: Rocky Swift at rswift5@bloomberg.net

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