Mizuho Sees 0.8% U.S. Yield as Gross Sings ‘Turning Japanese’
Prospects for deflation and additional monetary easing by central banks will push the rate to 0.8 percent at the end of 2012, said Akira Takei, head of the international fixed-income department for Mizuho Asset, a unit of Japan’s third-biggest listed bank. That’s about half prevailing U.S. interest rates and in line with current yields on Japanese government bonds that are the lowest among the world’s 15 biggest debt markets.
The U.S. is following Japan, which is struggling to end deflation and economic stagnation, Takei said. The view puts him in the same camp as Bill Gross, who runs the world’s biggest bond fund at Pacific Investment Management Co. and said this month global bond markets “are turning Japanese.”
“It’s highly likely that 10-year Treasury yields will drop to the same level as JGBs,” Tokyo-based Takei, who helps manage about $41.9 billion, said in a telephone interview on June 6. “Investor confidence is being destroyed and the risk of deflation is rising.”
Europe’s debt crisis and signs of slowing growth in the U.S. pushed 10-year Treasury yields to a record low of 1.44 percent on June 1. Three days later, rates on similar maturity Japanese government bonds touched 0.79 percent, the least since 2003.
“Bond markets are turning Japanese,” Gross wrote in a June 4 Twitter posting. “I really think so,” he wrote, quoting the refrain from a 1980 song by the Vapors.
U.S. two-year yields fell to within two basis points of rates on same-maturity bonds in Japan in September. The spread is now about 16 basis points, or 0.16 percentage points. The extra yield investors demand to hold 10-year notes in the U.S. instead of Japan has narrowed to 73 basis points from this year’s high of 1.35 percentage points in March.
“Global yield spreads for short-term securities are disappearing, and I expect that phenomenon to ripple into the longer maturities,” Takei said.
U.S. 10-year yields sank to the all-time low on the day that Labor Department data showed the nation added fewer than half the number of jobs that economists expected. That boosted expectations the Federal Reserve will increase debt purchases when its current program of extending the maturity of bond holdings comes to an end this month.
The decline in yields indicates investors are cutting bets on inflation. The difference between rates on five-year notes and same-maturity Treasury Inflation Protected Securities, a gauge of expectations for consumer prices, narrowed to 1.58 percentage points on June 4, the least in five months. The average over the past decade is 1.93 percentage points.
Japan’s so-called lost decade during the 1990s after the collapse of real estate and asset bubbles saw the economy slip in and out of recession, with higher unemployment and price deflation.
U.S. policy makers say they’re trying to learn from Japan’s experience.
“The lesson is, you want to be more aggressive” in supporting the economy, New York Fed President William C. Dudley said May 24. San Francisco Fed President John Williams said in a speech in Washington on June 6 that the central bank needs to “stand ready” to avoid a Japan-like outcome.
Takei was betting on a Treasury rally as far back as 2009. U.S. debt lost 3.7 percent in 2009, returned 5.9 percent in 2010, 9.8 percent in 2011, and 1.7 percent this year through yesterday, according to Bank of America Merrill Lynch indexes.
Treasuries are “perceived as a liquidity haven and as a quality haven for the rest of the world,” Pimco’s Gross said in an interview on Bloomberg Television’s “Street Smart” on May 31. Ten-year yields will be at about 1.75 percent by the end of 2012, Gross said.
Takei’s prediction is at odds with the estimates from economists surveyed by Bloomberg showing the the yield will rise to 2.18 percent by year end.
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