The biggest difference in yields between U.S. and Japanese 30-year government debt in almost two years suggests Treasury bonds may be among the biggest winners if the Bank of Japan begins buying longer-maturity securities.
The bottom panel of the CHART OF THE DAY shows the spread earlier this month reached its largest since August 2011. The gap widened as the yield on the Japanese securities known as JGBs, the orange line in the top panel, slid to a two-and-a-half-year low amid speculation central-bank steps will include purchases of longer-term debt. The yield was 1.62 percent on March 22, while the U.S. 30-year bond, the white line, yielded 3.15 percent.
“Assuming the BOJ does buy longer-term debt and JGB yields move even lower, domestic investors will look desperately elsewhere to try and generate some income,” said Marc Ostwald, a fixed-income strategist at Monument Securities Ltd. in London. “These investors, who own 92 percent of the JGB market, will have extra cash after the sales to the central bank and may buy U.S. 30-year debt, given yields are at over 3 percent. This will put a big cap on the U.S. 30-year yield.”
Bank of Japan Governor Haruhiko Kuroda said in his inaugural press conference March 21 that he will do whatever he can to achieve a 2 percent inflation target as soon as possible and reiterated prior comments that purchases of longer-term debt would help reach that goal.
The Bank of Japan currently purchases government bonds with maturities of up to three years, as well as exchange-traded funds, real-estate investment trusts and other risk assets, through a fund targeted to reach 76 trillion yen ($800 billion) by the end of this year.