Japan's Biggest Bank Builds U.S. MBS Unit as Rates Fall at Home

Mitsubishi UFJ Financial Group Inc. is building a U.S. mortgage-bond trading team as tough lending conditions in Japan spur the nation’s biggest bank to expand overseas.

The bank hired Dave Cannon to lead the effort, said a person with knowledge of the matter. Hiroaki Konishi, a Tokyo-based spokesman for MUFG’s securities business, confirmed that Cannon was hired at the end of last year and said the group’s U.S. securities unit began trading U.S. mortgage securities this month. Konishi declined further comment.

Cannon, who is head of agency mortgage bonds at MUFG, was co-head of asset- and mortgage-backed bond trading for Royal Bank of Scotland Plc until departing early last year as that lender was shrinking its mortgage bond business in Greenwich, Connecticut.

MUFG is focusing its U.S. mortgage-bond trading on government-backed securities, an area that many competitors have been pulling back from. The Federal Reserve now owns nearly a third of the securities known as "agency" mortgage bonds, which has weighed on trading volumes and profitability for banks.

The Japanese bank faces pressure at home, too. Earlier this month, MUFG said its profit for the quarter ended Dec. 31 fell 27 percent, led by a drop in bond trading and lending income.

That pressure may continue after the nation’s central bank cut rates below zero last month, which weighs on banks’ income from lending and from investments in domestic government debt. The introduction of 0.1 percent negative interest rates could shave 1.5 percent off profits at Japanese banks, Goldman Sachs Group Inc. analysts including Katsunori Tanaka wrote in a note on Jan. 29.

Even if Japanese banks have an incentive to invest more overseas, where rates are not negative, those efforts may be impeded by factors including U.S. rate hikes, which make funding in dollars more expensive, Sean Creehan, at the Federal Reserve Bank of San Francisco, wrote on its website Wednesday.

“For now, the banks sit between a rock and a hard place,” Creehan wrote.

Shares in MUFG plunged after the Bank of Japan cut rates to below zero, a move designed to spur banks to lend even as the economy shows signs of weakening.