Bloomberg News

Pimco Favors Shorter Debt as Saving Boosts Yen: Japan Credit

July 19, 2011

July 20 (Bloomberg) -- Pacific Investment Management Co., manager of the world’s biggest bond fund, favors Japan’s shorter-maturity securities as the nation’s trade surplus supports the yen and stems concern its debt burden will widen.

While the record earthquake in March has worsened the outlook for Japan’s budget deficit, it has prompted companies to save more and focus on domestic assets, said Tomoya Masanao, the head of portfolio management for Japan at Pimco. Notes maturing in one to three years have risen 2.4 percent in July in dollar terms, set for the biggest gain this year, an index compiled by Bank of America Merrill Lynch showed. Similar-maturity Treasuries have risen 0.2 percent.

“The yen is not very beautiful but is the cleanest dirty shirt,” said Masanao. “Japan is running a current-account surplus, which means the private sector has savings that are more than enough to finance the public sector’s deficit.”

Japan’s currency has outperformed the euro and dollar for the past three months as leaders in both Europe and the U.S. clashed on policies for containing government debt. Overseas investors bought a net 4.91 trillion yen ($62 billion) in Japanese bonds and notes through June, set for the biggest annual purchase in four years, Ministry of Finance data showed.

Euro-area leaders will meet in Brussels this week to discuss the “financial stability” of the region, European Union President Herman Van Rompuy said in a statement. U.S. President Barack Obama and leaders of Congress face an Aug. 2 deadline to raise a $14.3 trillion debt ceiling.

Trade Surplus

While Japan has public debt that’s twice as big as its annual economic output, its current-account surplus allows the nation to finance itself without relying on foreign capital. The current account is the difference between total exports of goods, services and transfers, and imports of them. The surplus narrowed 51.7 percent in May from a year earlier to 590.7 billion yen, the Finance Ministry said on July 8.

The yen has climbed 4.6 percent for the past three months, according to Bloomberg Correlation-Weighted Currency Indexes. The euro lost 2.9 percent, while the dollar dipped 0.1 percent. Japan’s currency reached 78.47 per dollar on July 14, the strongest since the post-World War II high set on March 17.

Prospects that developed nations will have to maintain monetary stimulus to prop up their economies have also supported bonds. The Bank of Japan has maintained its benchmark interest rate at a range of zero to 0.1 percent since October. That compares with the Federal Reserve’s range of zero to 0.25 percent.

Swaps traders have slashed bets on increases in the European Central Bank’s key rate, now at 1.5 percent, to 13.5 basis points in the next 12 months from 43.9 points at the end of December, according to a Credit Suisse Group AG index.

Risk Vs. Reward

Japan’s government debt reached 200 percent of gross domestic product last year, compared with less than 100 percent levels in the U.S. and the euro region, based on data from the Organization for Economic Cooperation and Development. Greece, which was downgraded by Fitch Ratings to the company’s lowest grade on July 13, had debt equivalent to 147 percent its economy.

Investors in Japanese debt aren’t sufficiently rewarded for owning longer-term bonds, said Masanao. The extra yield on 20- year bonds over two-year notes fell to 1.7 percentage points on July 14, the least since Jan. 3. The yield on benchmark 10-year security slid to 1.060 percent yesterday, a level not seen since Nov. 19 and the lowest among the 32 markets tracked by Bloomberg. The yield was at 1.075 percent as of 11:05 a.m. today in Tokyo.

Safe at Front

“We don’t see good value at the long end of the curve, whereas the front end is still a safe place to park your money,” Masanao said.

Demand for Japan’s debt has remained resilient amid calls for the early resignation of Prime Minister Naoto Kan, who survived a parliamentary vote of no confidence last month by promising to step down, without specifying a time. The Asahi newspaper reported on July 12 that 70 percent of respondents in its opinion poll said Kan should resign by the end of August.

Japan’s “revolving door” leadership was a credit negative factor, Moody’s Investors Service said last month after putting the nation’s debt rating on review for a downgrade in May. Kan, the fifth prime minister since September 2006, pledged reforms when he took office a year ago that would balance the budget in 10 years and rein in a debt burden.

“We are surrounded by many bond-buying factors, including the U.S. debt issue, U.S. slowdown concern, Europe’s turmoil and Japan’s political gridlock,” said Jun Fukashiro, a money manager who helps oversee about $17 billion at Toyota Asset Management Co. in Tokyo. “Yen-denominated assets are being used as a refuge.”

Five-year contracts to insure Japanese government bonds against default were at 91.82 basis points in New York yesterday, according to data by CMA, which is owned by CME Group Inc. and compiles prices quoted by dealers in the privately negotiated market.

--With assistance from Rocky Swift in Tokyo and Sandy Hendry in Hong Kong. Editors: Rocky Swift, Jonathan Annells.

To contact the reporters on this story: Yoshiaki Nohara in Tokyo at; Masaki Kondo in Singapore at; Fion Li in Hong Kong at

To contact the editors responsible for this story: Rocky Swift at; Sandy Hendry at

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