The yield on 30-year US Treasuries could plunge to almost zero within two years as investors seeking higher income streams shift funds from Japanese government bonds into the US, Japan’s biggest brokerage said.
“Japanese money” will move into the sovereign securities of other major economies, as about ¥900 trillion (US$8.9 trillion) of Japanese government bonds offer negative yields, Nomura Holdings Inc Tokyo-based chief credit strategist Toshihiro Uomoto wrote in a report on Monday.
The decline in global yields will weigh on consumer sentiment, put pressure on banks’ interest income and might result in more stimulus from central banks, said Uomoto, who was ranked as Japan’s top credit analyst by Nikkei Veritas in three of the four past years.
“The trend toward declining interest revenues from falling rates will accelerate and give birth to a vicious circle,” he wrote.
Uomoto yesterday said by telephone that he did not see US Treasury yields going negative, because the US Federal Reserve is not in the market buying bonds, unlike the Bank of Japan.
US debt due in 30 years yesterday yielded 2.26 percent as of 1:47pm in Tokyo, down from 3.02 percent at the end of last year. Equivalent-tenor Japanese notes yielded 0.33 percent, up by 3.5 basis points, while the rate for 10-year Japanese government bonds was minus-0.05 percent.
The Bank of Japan, which first took its key interest rate below zero on Jan. 29, last week unveiled limited additional stimulus measures that did not lower the benchmark further or increase its bond-buying program.
Bank of Japan Governor Haruhiko Kuroda has also ordered a review of the central bank’s policy framework due to uncertainty about the inflation outlook.
While the central bank has been targeting 2 percent inflation since 2013, Japanese consumer prices in June fell for the fourth month in a row.
One potential choice for the central bank is to reduce purchases of Japanese government bonds if it judges that its negative interest rate policy has sufficiently flattened the yield curve, Uomoto said.
Money moving out of Japanese government bonds and stocks will also move into credit investments and real estate, Uomoto said.
He urged corporate debt investors to take risks early and said credit spreads will probably stay low for the next one or two years.
A report last week showed that second-quarter US GDP grew at less than half the pace economists predicted, while Fed funds futures data compiled by Bloomberg show the probability of a hike this year is about 36 percent, down from 48 percent at the start of last week.
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