|How low can you go? US Treasuries do the limbo rock.|
Japan’s biggest bond bulls, seasoned by two decades of economic stagnation, say the plunge in yields below zero in Tokyo foreshadows record-breaking gains for U.S. Treasuries.His reason is driven by demographics:
Mitsubishi UFJ Kokusai Asset Management says U.S. 10-year yields will drop to 1 percent as soon as this month. Sumitomo Mitsui Trust Asset Management says it’s likely in 2017, and Mizuho Asset Management predicts the figure may go even lower. The yield, a benchmark for everything from U.S. mortgages to dollar bonds in developing nations, plunged to a never-before-seen 1.318 percent last week. A surging jobs report wasn’t enough to derail the rally.
“Welcome to the world of Japanification,” said Hideo Shimomura, the 49-year-old chief fund investor at Mitsubishi UFJ Kokusai in Tokyo, which oversees about $119 billion. “One percent is inevitable.”
Shimomura has 20 years of experience in bonds and has been bullish on Treasuries since 2010, watching the 10-year yield tumble 2 1/2 percentage points as Japan’s slumped all to way to zero. He’s seen the same trends in Japan play out in the U.S., with an aging population and competition from low-cost manufacturers cooling inflation. Higher welfare costs limit room for fiscal stimulus, encouraging monetary authorities to pump money into the economy, where banks park the cash in bonds instead of using it to make loans.That said, there are reasons why this comparison may be superficial:
Japan has 26 percent of its population over the age of 65, compared with 15 percent in the U.S., based on World Bank estimates. U.S. baby boomers, born when birth rates spiked for almost two decades after World War II, began turning 65 in 2011, according to the U.S. census bureau. Those 65 and over will almost double in 2050 from 2012’s level, it estimates.
- Unlike Japan's economy which has been in and out of recession, the US is growing at a steady (if unspectacular) 2-point-something-percent rate. Ditto for Q2 2016;
- The US fertility rate is only slightly below the replacement rate at 1.9 births per woman, whereas Japan is already depopulating and has a fertility rate of 1.4;
- Unlike Japan, the US is a country which has traditionally welcomed migrants in large numbers. If it has shortfalls in available workers or domestic demand, it can easily bring in more folks.