Draghi Lost Decade Risk Rises for Japanese Picking Bond RalliesWes Goodman and Mariko Ishikawa
Japan’s biggest bond investors, emerging from a battle with deflation that sent yields tumbling, say Europe risks a lost decade like the one they’ve endured.
Daiwa SB Investments Ltd., Diam Co. and at least two other investors overseeing almost $250 billion in combined assets say a record-setting rally in German and other European bonds has further to go. Investors were willing to accept just 39 basis points of extra yield to purchase 10-year notes in Germany instead of Japan this week, narrowing from 132 as recently as September 2013.
Yields across the euro area slid to records after European Central Bank President Mario Draghi last month added to speculation he’s preparing Japan-style debt purchases known as quantitative easing to support the economy. ECB policy makers meet tomorrow. To investors in Tokyo, the situation looks like what they went through in the 1990s as the collapse of a real-estate bubble and tumbling consumer prices led the Bank of Japan to start its own QE program in 2001.
“From the perspective that Europe is facing deflationary pressure and low growth and is looking to roll out QE, we can say yields are turning Japanese,” Shinji Kunibe, the head of foreign-bond management at Daiwa SB in Tokyo, said in a telephone interview on Aug. 29. The company manages the equivalent of $46.6 billion.
Bond yields across the euro area have tumbled since Draghi said at the Kansas City Fed’s annual conference in Jackson Hole, Wyoming, last month that the central bank will use “all the available instruments needed to ensure price stability” and is “ready to adjust our policy stance further.”
German 10-year yields dropped to a record 0.866 percent last week. They may fall to match Japan’s of about 0.5 percent once quantitative easing starts, Kunibe said. German 10-year bonds yielded 0.96 percent at 10:38 a.m. today in London.
Europe is already about half way toward a lost decade, after a debt crisis sent bond yields including those in Italy, Spain, Greece and Portugal surging in 2011 and 2012, threatening to undo the currency bloc.
The euro area’s annual inflation slowed to 0.3 percent in August, increasing pressure on the ECB to take action. The central bank’s inflation target is just under 2 percent. The unemployment rate stayed close to a record high.
The Federal Reserve also uses quantitative easing in the U.S., though it is scaling back its debt purchases and is on course to end them this year.
The threat of deflation in the euro area is translating into bond gains. European government debt returned 12 percent during the past year, according to Bank of America Merrill Lynch indexes. Japan’s gained 2.8 percent, and America’s climbed 3.7 percent, the data show.
Diam has favored German bunds since July and there’s no reason to sell now, said Hajime Nagata, one of the investors for the equivalent of $113.7 billion the company oversees in Tokyo.
“The European economic situation is getting worse,” Nagata said in a telephone call on Aug. 29. “The euro is facing the threat of deflation.”
Mizuho Asset Management Co. is less optimistic on European sovereign debt. The ECB is being more proactive than the BOJ was, said Yusuke Ito, one of the investors for the equivalent of $38 billion at the company in Tokyo.
“If you look at the German 10-year yield, the room to go down further is somewhat limited,” he said in a telephone call Sept. 1. “The rally was very sharp, and now it’s more or less over.” Mizuho Asset Management holds fewer German bonds than the percentage in the index it uses to gauge performance and an equal weighting of Spain and Italy as the benchmark, he said.
At Mitsubishi UFJ Asset Management Co., Hideo Shimomura, the chief fund investor, said Europe’s experience is similar to Japan’s but not the same. Inflation is slowing in the euro area though prices haven’t gone into a downward spiral.
German 10-year yields may fall to 0.5 percent or 0.6 percent as soon as next month, said Shimomura, one of the investors for the equivalent of $76 billion at the company in Tokyo, based on an e-mail yesterday.
Europe’s economy is weak enough that the ECB will be copying the BOJ, if not at tomorrow’s meeting then later this year, said Satoshi Yamada, a manager of debt trading in Tokyo at Okasan Asset Management Co. in Tokyo.
“European bond yields will be under pressure to go lower,” he said in a phone call Sept. 1. “Europe looks to be following a somewhat similar path to Japan’s.” Okasan manages the equivalent of $11 billion.