BLBG : Buy U.S. Notes on Deflationary Spiral, Mizuho Says
Sept. 8 (Bloomberg) -- Investors should buy U.S. Treasury notes betting that price declines will prompt central banks to maintain lower rates, according to Mizuho Asset Management Co., a unit of Japan’s second-largest bank.
Two-year yields are likely to fall to a record low of 0.5 percent by year-end, while 10-year yields sink to the 2.75 percent level last seen in April, said Akira Takei, a Tokyo- based manager in the international bond investment department at Mizuho Asset. Economists in a Bloomberg survey say that the Federal Reserve is unlikely to raise interest rates through the second quarter of next year.
“Buy two-year notes now,” Takei said today in a telephone interview with Bloomberg. “Every central bank will be committed to keeping interest rates low for a long time. Deflationary pressure is now prevailing, which is very hard to get out of.”
Federal fund futures contracts signal a 2.7 percent chance the central bank will raise borrowing costs by year-end from the current range of between zero and 0.25 percent. The odds for an increase were 33 percent a month ago.
Two-year notes yielded 0.92 percent at 7:03 a.m. in London, according to BGCantor Market Data. Ten-year yields fell two basis points to 3.43 percent, decreasing the note’s advantage above the shorter-term note to 2.5 percentage points. The spread is likely to shrink to 2.25 percentage points, according to Takei’s forecasts. That would be the narrowest since May.
Should his predictions prove accurate, investors who buy two-year U.S. notes today would make a 1 percent return, while holders of 10-year notes would gain 6.6 percent, Bloomberg calculations show.
Inflation Expectations
U.S. producer prices dropped 5.4 percent in August from a year earlier, according to the median estimate of economists in a Bloomberg survey before the Sept. 15 report. On a monthly basis, prices probably rose 0.8 percent.
Treasury Inflation-Protected Securities maturing in one year yielded 77 basis points more than similarly-dated conventional notes today, signaling investors expect prices to decline. Inflation-adjusted securities typically yield less than regular bonds because their principal payment increases at the same rate as inflation.
