Gross Unheeded by Japan Seeing Disinflation Buoying BondsWes Goodman
Honed by 15 years of falling consumer prices that burnished the appeal of fixed-income assets in Japan, the Asian nation’s bond buyers are amassing long-term Treasuries as disinflation emerges in the U.S.
Led by Mizuho Asset Management Co., at least five money managers that oversee a combined $236 billion are snapping up Treasuries due in about a decade as inflation-adjusted yields approach the highest level since 1998 relative to Japanese government bonds. Japan’s holdings of U.S. debt rose by $98.2 billion last quarter, the second-largest increase since the Treasury Department began releasing the data in 2000.
While Pacific Investment Management Co.’s Bill Gross is recommending short-term U.S. debt, Japanese bond investors are finding value in longer-dated Treasuries as U.S. consumer prices rise the least since 2009. Prime Minister Shinzo Abe’s stimulus policies are also weakening the yen by the most in three decades this year, bolstering the allure of dollar-based assets.
“There’s tremendous deflationary pressure in the U.S.,” Yusuke Ito, a senior fund manager at Mizuho Asset Management, which oversees about $32 billion, said in a telephone interview from Tokyo on Dec. 4. “For bonds, the longer the maturity, the better” as slowing inflation preserves the purchasing power of fixed-rate interest payments.
Ito said the company held most of its U.S. debt in Treasuries due in five years and more and predicts yields on 10-year notes will fall to 2.10 percent by the middle of 2014 from 2.85 percent today. Mizuho Asset’s holdings also had a longer average maturity than those in the benchmark index it uses to gauge performance, he said.
Increased foreign demand may help temper any selloff in Treasuries when the Fed curtails its $85 billion in monthly purchases of Treasuries and mortgage-backed debt.
The U.S. has relied on overseas investors, who own about 50 percent of America’s obligations, to help finance deficits as increased government spending since the credit crisis more than doubled the debt outstanding to a record $11.8 trillion.
Yields on 10-year Treasuries have climbed more than one percentage point this year, after falling to a record 1.38 percent in 2012, on signs the economy is strengthening enough for the Fed to start scaling back its stimulus.
The U.S. 10-year yield rose 0.11 percentage point last week, according to Bloomberg Bond Trader prices, as a government report showed the jobless rate fell to a five-year low of 7 percent in November and employers added more workers than forecast. Treasury 10-year notes yielded 2.84 percent at 12:34 p.m. in New York.
With the annual inflation rate at 1 percent in the U.S., real yields for 10-year Treasuries are now about 1.85 percent, data compiled by Bloomberg show. That’s about 2.3 percentage points more than in Japan, where the inflation rate exceeds the 10-year bond yield by 0.43 percentage point.
As recently as June, yields adjusted for consumer-price gains favored Japanese debt.
“The real yield is negative in Japan, so foreign bonds are attractive,” Yoshiyuki Suzuki, Tokyo-based head of fixed income at Fukoku Mutual Life Insurance Co., which oversees about $56 billion, said in a telephone interview on Dec. 3. Fukoku has increased its holdings of 10-year Treasuries this year, he said.
Japanese holdings of U.S. government debt rose last quarter by the most since they boosted investments by a record $102.4 billion in the same period in 2011, Treasury data compiled by Bloomberg show. That increased the total stake to an unprecedented $1.18 trillion. Japan trails only China as the largest foreign owner of Treasuries.
Japan investors purchased a net 126.7 billion yen ($1.23 billion) of Treasuries in October, versus 1.26 trillion yen in September, Ministry of Finance data today showed.
Hajime Nagata, a money manager who helps oversee about $116 billion at Tokyo-based Diam Co., is bearish on Treasuries because he expects yields to rise further on longer maturities as growth in the U.S. gains momentum.
“I’m more confident in the U.S. economy than other market participants, so I expect to see yields edge higher,” Nagata said in a telephone interview on Dec. 3.
The U.S., the world’s largest economy, expanded at a 3.6 percent annualized rate last quarter, more than forecasters anticipated and the strongest expansion since the first three months of 2012, according to a government report Dec. 5.
One day later, jobs data showed a pickup in employment.
Pimco’s Gross said he remains focused on purchasing shorter maturities, “which are less susceptible to higher interest rates” as the Fed, the biggest buyer of longer-dated Treasuries, is poised to taper, speaking Dec. 6. on Bloomberg Radio.
The central bank will probably reduce its purchases in January, Gross, the world’s biggest bond-fund manager, wrote on Twitter yesterday.
Gross, who runs the $244.1 billion Pimco Total Return Fund in Newport Beach, California, didn’t respond to e-mail or telephone messages seeking comment on Japanese investors’ purchases of longer-maturity U.S. government debt.
Economists anticipate that 10-year yields will reach 3.41 percent by the end of 2014, while predicting the Fed will keep its target rate for overnight loans between banks at zero to 0.25 percent until 2015, data compiled by Bloomberg show.
Long-term Treasuries have lost about 12 percent this year, the deepest decline among the 144 government bond indexes globally compiled by Bloomberg and the European Federation of Financial Analysts Societies. Treasuries due in one to three years returned 0.4 percent, data compiled by Bloomberg show.
The inflation-adjusted yield spread, which is approaching the widest on a monthly basis since November 1998, still gives Japanese investors an incentive to pile into U.S. government bonds as Abe’s policies that were designed to revive the world’s third-largest economy take hold.
Abe, 59, who became prime minister less than a year ago, promised to boost the inflation rate to 2 percent, weaken the yen and lift Japan out of an economic malaise that has persisted since the nation’s asset bubble burst in the early 1990s.
Japan’s economy, which was surpassed in size by China in 2010, has grown an average of 0.84 percent annually in the past two decades, while consumer prices have declined an average 0.2 percent over the past 15 years, data compiled by Bloomberg show.
After Abe appointed Haruhiko Kuroda to lead the Bank of Japan, the central bank began a quantitative-easing program in April to purchase more than 7 trillion yen of government debt each month.
While the purchases cut yields on Japan’s 10-year bonds to 0.67 percent from this year’s high of 1 percent in May, they have also accelerated inflation as the yen heads for the biggest loss against the dollar since 1979 with a 16 percent slump.
Consumer prices in Japan have increased every month since June and jumped 1.1 percent from a year earlier in September and October, the most since 2008. That’s left real yields on Japan’s 10-year notes negative for three months, the longest stretch in five years, data compiled by Bloomberg show.
The opposite is happening in the U.S. Since reaching a three-year high of 3.9 percent in September 2011, consumer price gains have slowed. In October, prices rose 1 percent from a year earlier, according to a Nov. 20 Labor-Department report.
The Fed’s preferred measure of U.S. inflation, the personal consumption expenditures deflator, showed last week that prices rose 0.7 percent in October, the least since 2009. The gauge has failed to meet the Fed’s 2 percent target for 18 months.
“The Japanese have experience with 15 years of disinflation,” Hideo Shimomura, who oversees about $59 billion as chief fund investor at Mitsubishi UFJ Asset Management Co. in Tokyo, part of Japan’s largest publicly traded bank, said in a telephone interview Nov. 26. “Now it is spreading to the U.S. It’s worthwhile to take long-end risk in portfolios.”
Mitsubishi UFJ bought 10-year notes in November, he said.
Abe’s goal of weakening the yen to help the nation’s exporters suggests longer-dated Treasuries remain attractive for Japanese investors who are curtailing their investments in higher-risk emerging-market debt.
Investors in Japan are buying fewer developing-nation bonds than at any time since 2009, Ministry of Finance data show. The Bloomberg USD Emerging Market Composite Bond Index has fallen 4.2 percent in 2013.
While 10-year Treasuries have lost 7 percent this year, they returned 10 percent in yen terms because of the currency’s drop against the dollar, according to Bank of America Merrill Lynch indexes. Forecasters predict the yen will depreciate 5.6 percent more by the end of 2014, the most of any Asian currency, data compiled by Bloomberg show.
Sumitomo Mitsui Trust Asset Management Co.’s Hideaki Kuriki favors 30-year Treasuries, the longest-maturity U.S. debt.
“The growth rate is still low and the inflation rate is still low,” Kuriki, a money manager who helps oversee about $41 billion at Sumitomo Mitsui Trust, said in a telephone interview. “I bought a few months ago.”