- Expects ‘Japanese money’ will flow into other bond markets
- BOJ may consider cutting JGB purchases in its review: Nomura
The yield on 30-year Treasuries could plunge to almost zero within two years as investors seeking higher income streams shift funds from Japanese government bonds into the U.S., according to the Asian nation’s biggest brokerage.
“Japanese money” will move into the sovereign securities of other major economies as about 900 trillion yen ($8.9 trillion) of JGBs offer negative yields, Toshihiro Uomoto, Nomura Holdings Inc.’s chief credit strategist in Tokyo, wrote in a report on Monday. The decline in global yields will weigh on consumer sentiment, put pressure on banks’ interest income, and may result in more stimulus from central banks, according to Uomoto, ranked as Japan’s top credit analyst by Nikkei Veritas for three of the past four years.
“The trend toward declining interest revenues from falling rates will accelerate and give birth to a vicious circle,” he wrote. Uomoto said by phone Tuesday that he didn’t see Treasury yields going negative because the Federal Reserve isn’t in the market buying bonds, unlike the Bank of Japan.
U.S. debt due in 30 years yielded 2.28 percent as of 10:56 a.m. London time, down from 3.02 percent at the end of 2015. Equivalent-tenor Japanese bonds yielded 0.325 percent, up 3.5 basis points on the day, while the yield on 10-year JGBs was minus 0.06 percent.
The Bank of Japan, which first took its key interest rate below zero on Jan. 29, last week unveiled limited additional stimulus measures that didn’t lower the benchmark further or increase its bond buying program. BOJ Governor Haruhiko Kuroda has also ordered a review of the central bank’s policy framework due to uncertainty about the inflation outlook. While the BOJ has been targeting 2 percent inflation since 2013, Japanese consumer prices in June fell for the fourth month in a row.
One potential choice for the BOJ is to reduce purchases of JGBs if it judges that its negative-interest rate policy has sufficiently flattened the yield curve, according to Uomoto.
Money moving out of Japanese government bonds and stocks will also move into credit investments and real estate, according to Uomoto. He urged corporate debt investors to take risk early and said credit spreads will probably stay low for the next one or two years.
A report last week showed second-quarter U.S. gross domestic product grew at less than half the pace economists predicted, and fed funds futures data compiled by Bloomberg, show the probability of a hike this year is about 36 percent, down from 48 percent at the start of last week.