Bloomberg News

Bond Luring Mizuho Supports Bernanke to Kuroda Policies

April 08, 2013

Long Bond Luring Mizuho Supports Bernanke to Kuroda Policies

Pedestrians are reflected on a wall as they walk through an underground passageway in Tokyo. Japan is still struggling to pull out of its third recession in the past five years as gross domestic product rose an annualized 0.2 percent in the fourth quarter of 2012 after two straight contractions. Photographer: Tomohiro Ohsumi/Bloomberg

Japan’s biggest investors are shunning their government’s bonds in favor of U.S. Treasuries, endorsing the policies of Bank of Japan Governor Haruhiko Kuroda to spark inflation and aiding Federal Reserve Chairman Ben S. Bernanke’s efforts to spur U.S. economic growth.

Mizuho Asset Management Co., a unit of Japan’s third- largest bank, is buying Treasuries, as are Sumitomo Mitsui Trust Asset Management Co. and Mitsubishi UFJ Asset Management Co., which together oversee the equivalent of $138.3 billion. The securities have become appealing as rising Japanese bond prices pushed yields below those of U.S. debt by the most since 2011.

Heightened demand from Japan for long-term Treasuries is helping the Fed keep borrowing costs low to bolster growth and decrease an unemployment rate above 7 percent. The flow into Treasuries weakens the yen as local investors sell the currency to buy dollars, aiding Kuroda’s goal of pulling Japan out of its third recession since 2008 and ending 15 years of deflation.

“We bought in the very long end,” Akira Takei, the manager of international bond investment for Tokyo-based Mizuho, said in telephone interviews March 27 and April 2, after buying 30-year Treasuries, or so-called long bonds. “When I visit clients, instead of being confined to JGBs, they’re thinking about putting their money abroad.”

Tumbling Yields

Yields on 30-year Japanese government bonds tumbled to a record low of 0.925 percent last week, or as much as 2.06 percentage points less than similar-maturity U.S. debt, according to data compiled by Bloomberg. The gap was 1.68 percentage points today.

Kuroda, who took over as Bank of Japan governor in March, said April 4 the central bank will double monthly bond buying to 7.5 trillion yen ($76 billion), while suspending a cap on holdings, ending a three-year maturity limit on BOJ purchases and saying policy will target the money supply instead of overnight rates. The government’s goal of 2 percent inflation to reverse price declines is achievable in two years, he told reporters.

The announcement was a blow to bond bears, who dumped Treasuries earlier in 2013 on concern the three-decade rally was ending as 10-year U.S. note yields rose to 2.08 percent on March 8, the highest in almost a year. Even though rates have dropped, they are higher than their global counterparts.

Yields on Treasuries due in 10 years or more were 57 basis points above those of non-U.S. sovereign debt on March 25, the widest gap since 2011, according to Bank of America Merrill Lynch indexes. As recently as September, U.S. yields were lower than those of the rest of the world.

Job Losses

Investors pushed 10-year JGB yields to a record low 0.315 percent a day after the central-bank meeting. The 20-year yield fell to the least in a decade, according to Japan Bond Trading Co., the nation’s largest interdealer debt broker.

Yields (USGG10YR) on 10-year Treasuries fell 14 basis points last week, or 0.14 percentage point, to 1.71 percent, according to Bloomberg Bond Trader data, as a Labor Department report on April 5 showed U.S. employers added 88,000 jobs in March, the smallest gain in nine months. The price of the benchmark 2 percent note due in February 2023 rose 1 7/32, or $12.19 per $1,000 face amount, to 102 19/32.

The yen weakened 1 percent to 98.57 as of 9:56 a.m. New York time after reaching 99.01, the weakest since May 2009. The U.S. 10-year note yield was little changed at 1.71 percent.

BOJ policies will put “money in motion” and give Japanese investors incentive to buy Treasuries, Bill Gross, who runs the world’s biggest bond fund at Pacific Investment Management Co. in Newport Beach, California, wrote last week on Twitter.

Moving Out

“That money now is expected to move out of Japan into Treasuries, into other high-quality markets at higher yields,” Gross said April 4 on Bloomberg Television’s “Street Smart” with Adam Johnson and Sara Eisen. Gross manages Pimco’s $289 billion Total Return Fund (PTTRX).

Firms such as JPMorgan Chase & Co. said some Japanese investors may also put their money in core European government bonds. Strategists at the New York-based bank said it now recommends an “overweight” position in bonds of Spain, where 10-year yields ended last week at 4.75 percent.

Japanese holdings of Treasuries have grown to $1.12 trillion, up 26 percent from $886 billion two years ago and second only to China (HOLDCH) among foreign nations, which has $1.26 trillion, Treasury Department data from January show. The Fed, through its bond buying known as quantitative easing, owns $1.8 trillion.

Rising Demand

Non-U.S. investors continue to scoop up Treasuries, with the Fed’s holdings of U.S. government debt on behalf of foreign central banks rising $63.5 billion, or 2.2 percent, last quarter to $2.95 trillion, according to the central bank. That follows a 10.7 percent increase for all of 2012.

“Treasuries are becoming more attractive than JGBs,” Yoshiyuki Suzuki, the head of fixed-income in Tokyo at Fukoku Mutual Life Insurance Co., said in a telephone interview April 2. “Japan’s 10-year yield is ridiculously low.” The firm may increase its allocation to the U.S., he said.

Diam Co. is betting long-term U.S. bonds will fall, Hajime Nagata, a money manager who helps oversee the equivalent of $109 billion in Tokyo, said in a telephone interview March 27.

The unit of Dai-Ichi Life Insurance Co. holds shorter durations than the benchmarks it uses to gauge performance because the Fed’s promise to keep its target rate for overnight loans at about zero makes them a safer bet. Duration measures a security’s price sensitivity to changes in yield.

Recession Struggles

Japan is struggling to pull out of its third recession in the past five years as gross domestic product rose an annualized 0.2 percent in the fourth quarter of 2012 after two straight contractions.

While the government has said it wants to boost inflation to 2 percent or more, consumer prices in Japan fell 0.7 percent in February from a year earlier, government data show.

Bond traders are signaling the new government plan might work. The yield on Japan’s five-year inflation-linked bond dropped to negative 1.42 percent last month, the least ever based on Bloomberg data that go back to 2009, reflecting demand for protection against rising costs in the economy.

“Fixed-income investors in Japan have limited options with what to do with the cash they will receive once the Bank of Japan starts buying JGBs in size,” George Goncalves, the head of interest-rate strategy in New York at Nomura Holdings Inc., the largest brokerage firm in Japan, said in a telephone interview on April 2. “This will benefit U.S. Treasury bonds.”

Currency Boost

The yen’s 11 percent plunge this year is also making Treasuries more alluring to Japanese investors. A slide that began at the end of September escalated after Japanese Prime Minister Shinzo Abe pushed for greater monetary stimulus to debase the currency and spark inflation in the world’s third- biggest economy after the U.S. and China.

Its 21 percent decline has made it the worst performer during the past six months among 10 major currencies tracked by Bloomberg Correlation-Weighted Indexes.

Mitsubishi UFJ, a unit of Japan’s largest publicly traded bank, said further yen weakening will improve returns on U.S.- denominated investments, as cash flows are repatriated.

“The outlook for yen depreciation is good for foreign assets,” Hideo Shimomura, the chief fund investor at Tokyo- based Mitsubishi UFJ, which manages the equivalent of $63.2 billion, said by telephone March 25. He said he favors Treasuries due in a decade or longer and would consider buying if 10-year yields rise to 2 percent.

Bernanke’s Advice

Bernanke has long pushed the Bank of Japan to combat deflation and stagnating growth. While a Princeton University economics professor in 1999, he berated Japanese officials for not doing enough to fight deflation and revive their economy, writing in a paper that their monetary policy “seems to be suffering from a self-induced paralysis.”

Determined to avoid those mistakes, the Fed chief has purchased more than $2.5 trillion of bonds since 2008 to keep rates low and spur job creation. The central bank is buying $85 billion of Treasury and mortgage debt a month.

The stimulus hasn’t ignited inflation. U.S. consumer prices increased 2 percent in February from a year earlier, in line with the Fed’s target, slowing from 2.9 percent in February 2012, according to the Labor Department. U.S. GDP is likely to expand 1.9 percent this year, according to 83 economists in a Bloomberg survey.

“Kuroda-san changed everything,” Genzo Kimura, who helps oversee the equivalent of $43.4 billion as a bond investor in Tokyo at Sumitomo Mitsui Trust, said in a telephone interview April 5. “The world has changed and JGB yields are so low. It’s not attractive. I bought Treasuries” last week, he said.

To contact the reporters on this story: Wes Goodman in Singapore at wgoodman@bloomberg.net; Liz Capo McCormick in New York at emccormick7@bloomberg.net

To contact the editors responsible for this story: Rocky Swift at rswift5@bloomberg.net; Dave Liedtka at dliedtka@bloomberg.net


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