BlackRock Says Trend Is Friend as Yield Gap Slides: Japan CreditMariko Ishikawa and Shigeki Nozawa
BlackRock Inc., the world’s largest asset manager, says don’t fight the Bank of Japan’s efforts to drag long-term interest rates beyond a four-year low relative to shorter yields.
The premium investors demand to hold 20-year Japanese government bonds over 2-year notes shrank to 1.34 percentage point on March 29, the least since December 2008. JGBs with more than 10 years of maturity handed investors 6.4 percent in the first quarter, the best performance since the last three months of 2008, Bank of America Merrill Lynch data show. That compares with a 2.35 percent loss on U.S. Treasuries.
BOJ Governor Haruhiko Kuroda said last week he’ll consider all possible measures to influence the so-called yield curve, including extending bond maturities in its asset-purchase fund and scrapping a limit on JGB holdings. The 10-year and 20-year rates dropped to the lowest in almost a decade before the central bank’s two-day policy meeting starting tomorrow.
“There’s no point in betting against a central bank that is pledging aggressive policy no matter what,” Shigeru Endo, a fund manager at BlackRock Japan Co., said in an interview in Tokyo on March 26. “The BOJ will continue to buy and a sudden surge in inflation is unlikely.”
The benchmark 10-year bonds yielded 0.56 percent today, according to Japan Bond Trading Co., the nation’s largest interdealer debt broker. The rates touched 0.51 percent on March 28, the least since June 2003, when the all-time low of 0.43 percent was set. About a month later, the rate shot up to 1.4 percent and ended the year at 1.36 percent.
“While the 10-year yield had a sharp surge from the record low in 2003, it may be different this time around,” said Endo, whose parent company manages about $3.7 trillion. He declined to comment on specific investment strategies.
Kuroda told lawmakers last week that he doesn’t see signs of a bubble in the JGB market. He has said he’ll consider abolishing the BOJ’s self-imposed bank-note rule that its government bond holdings don’t exceed the value of all yen in circulation. Kuroda said in parliament today that he wants the policy board to discuss the rule.
“The governor himself admits that the theme in the market is flattening of the yield curve,” said Satoshi Yamada, a Tokyo-based manager of debt trading at Okasan Asset Management Co., which manages the equivalent of $12 billion. “While it’s uncertain how far the BOJ will go, investors are more inclined to go longer as they don’t expect an exit from deflation any time soon.”
Elsewhere in Japan’s credit markets, Toyota Finance Corp. hired banks for a bond sale this month, according to a statement yesterday from Mizuho Financial Group Inc., which is managing the offering with Mitsubishi UFJ Morgan Stanley Securities Co., Nomura Holdings Inc., SMBC Nikko Securities Inc. and Tokai Tokyo Financial Holdings Inc.
Daiwa Securities Group Inc. plans to price 30 billion yen ($323 million) of three-year notes for individual investors on April 5, according to a filing yesterday with the Ministry of Finance.
The extra yield that investors demand to hold Japanese corporate bonds rather than sovereign debt was at 38 basis points yesterday, after sliding to 37 on March 31, the lowest since August 2011, according to Bank of America Merrill Lynch index data. The so-called spread for company notes worldwide was 149 basis points, the data show.
The yen rose 0.4 percent to 92.85 per dollar at 3:21 p.m. in Tokyo, after dropping 7.9 percent in the first three months of the year. The currency reached 96.71 on March 12, the weakest since August 2009.
Japan has the world’s lowest interest rates even with the biggest public debt burden globally. Liabilities may grow to 245 percent of economic output this year, according to the International Monetary Fund. Former BOJ Governor Masaaki Shirakawa warned of a surge in interest rates and inflation if there’s a perception the central bank is financing government deficits, a phenomenon known as monetization.
The JGB market is showing few signs of concern the widening debt pile will lead to a collapse in bond prices.
While the cost to insure Japan’s sovereign notes has climbed to 75 basis points as of yesterday, that’s still less than half of last year’s high of 154, according to data provider CMA, which is owned by McGraw-Hill Cos. and compiles prices quoted by dealers in the privately negotiated market. An increase in credit-default swaps signals worsening perceptions of creditworthiness, while a decrease suggests the opposite.
The 20-year yield slid to 1.36 percent on March 29, a level unseen since July 2003. Its spread over the 10-year rate last week was at 84 basis points, or 0.84 percentage point, the least since August.
Goldman Sachs Group Inc. expects higher global interest rates to “gradually” drive Japan’s 10-year rate higher to 0.75 percent by the end of the year, flattening the spread with the 20-year rate to 65 basis points.
“The ultra-long end of the curve, which is currently very steep, should flatten in reaction to the additional monetary policy easing that we and the market expect from the BOJ,” Francesco Garzarelli, co-head of macro and markets research at Goldman Sachs, wrote in a report on March 27. “For moderate increases in yields, the fiscal risk would actually decline, as achieving an inflation rate in line with the BOJ’s new target would improve the debt outlook.”
A government auction of 2.2 trillion yen of 10-year bonds today drew bids valued at 3.22 times the amount on offer, higher than last month’s so-called bid-to-cover ratio of 2.37 times and the average of 3.15 times at the 10 previous sales, according to Ministry of Finance data.
The BOJ now buys government bonds with maturities of one to three years through its 76 trillion-yen asset-purchase program set up in October 2010. The buying has dragged market rates on those notes below 0.1 percent, or the upper end of the BOJ’s policy rate. The 10-year yield has stayed below 1 percent since April, when the BOJ lengthened the maximum maturity of JGBs it purchases to three years from two years.
A separate outright purchase operations known as rinban soaks up 21.6 trillion yen each year in bonds due in as long as 30 years, with 90 percent allocated to securities maturing in 10 years or less.
“If we assume that the QE expansion had an impact on the market, it’s possible yields will stabilize at very low levels going forward,” BlackRock’s Endo said, referring to so-called quantitative easing. The BOJ’s expansion of stimulus steps “would not seem aggressive unless the BOJ also increases bond buying of more than 10 years of maturity by combining the APP and the rinban.”
Kuroda said in parliament on March 26 that he envisages achieving the BOJ’s 2 percent inflation target in two years. Economic reports so far have shown few signs of an economic pick-up or a return to rising prices.
Consumer prices excluding fresh food slid 0.3 percent in February from a year earlier, data showed last week, the fourth-straight month that the cost of living fell.
The BOJ’s quarterly Tankan sentiment index for large manufacturers recovered to minus 8 in March from minus 12 in December, a report showed yesterday. While that was the steepest gain since September 2011, it was below the minus 7 reading expected by economists in a Bloomberg survey. A negative figure means pessimists outnumber optimists.
“The actual effectiveness of Kuroda’s policy doesn’t really matter as it’s solely aimed to drive up people’s expectations,” Endo said.