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Japanese Fund Bets on Treasuries, Seeing Fed Rates Nearing Zero

Chikafumi Hodo and Daisuke Sakai
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Japanese Fund Bets on Treasuries, Seeing Fed Rates Nearing Zero

(Bloomberg) -- Japan’s Asset Management One Co. has a bullish call on Treasuries. One for the long, long run.

The money manager overseeing the equivalent of $488 billion says benchmark U.S. yields will keep falling as structural changes in the economy and stubbornly low inflation see the Federal Reserve following its peers in Japan and Europe in lowering interest rates toward zero.

“The U.S. will stay in a monetary easing cycle in the long run,” said Yusuke Ito, a fund manager in the global fixed income investment division at Asset Management in Tokyo. “There are structural issues which need to be addressed. The problem of aging demographics is slowly coming and will affect the supply-and-demand balance in the economy.”

The bullish long-term call on Treasuries by one of Japan’s biggest funds is a warning that investors may be misplaced over the state of the U.S. economy. Having witnessed decades of stagnant growth at home, Japanese money managers have had a ring-side view of how rates keep falling when structural forces become the dominant drivers.

The Treasury yield curve is expected to steepen as the Fed’s easing phase extends, Ito said, without providing any yield forecasts. Ten-year yields have slipped 90 basis points this year to 1.78% to head for their biggest annual drop since 2011, as the Fed lowered interest rates three times.

Heading into 2020, the key questions for investors worldwide are how much further will the Fed go in easing its monetary policy and whether the U.S. and China will be able to reach a trade deal. Futures traders are pricing in just one quarter-point rate cut next year, even as some strategists see two reductions.


Signals of a slowdown in the U.S. manufacturing sector will weigh on the labor market and consumption, Ito said. The trade dispute “won’t resolve easily” as both China and America are fighting a battle for supremacy, he said, citing it as another reason for Treasury yields to decline.

Asset Management sold Treasuries when the 10-year yield dropped to a three-year low of 1.43% in September as the market was “overheating,” Ito said. However, it bought the securities when signs of progress in trade talks saw yields rise back toward 2%. They won’t climb back to those levels anytime soon, he said.

Asset Management’s bullish call comes when traders have been indicating that Asian real-money funds -- including from Japan -- have been steady buyers of long-end U.S. debt over the past two weeks.

Mexico, Italy

The money manager has also been overweight Mexican bonds as it sees “large room” for the central bank to ease policy, including a move as early as December, Ito said. That’s even as the monetary authority cut the benchmark rate by a quarter point to 7.50% earlier this month.

“Mexico moved very closely with the Fed in raising rates but it may have tightened too much, restraining inflation and causing its economy to slow down,” Ito said.

Asset Management is “very bullish” on Italy as it considers the nation’s bonds to be undervalued relative to those in Portugal or Greece, Ito said. It also finds Spanish debt appealing for the nation’s current-account surplus and push for economic reforms.

The money manager doesn’t prefer bonds in other European nations “as there isn’t much room for the European Central Bank to ease its monetary policy,” Ito said.

(Updates prices in the fifth paragraph.)

--With assistance from Alyce Andres.

To contact the reporters on this story: Chikafumi Hodo in Tokyo at chodo@bloomberg.net;Daisuke Sakai in Tokyo at dsakai2@bloomberg.net

To contact the editors responsible for this story: Tan Hwee Ann at hatan@bloomberg.net, Shikhar Balwani, Brett Miller

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