The Rise and Rise of Japanese Bonds

With the yen rising, and the deflation outlook predicatbly worsening, investors are digging in for the winter and buying bonds. The consequence: the yield curve is now just about horizontal as far as the eye can see, and the thirty year return is now below !% for the first time in history. Thos who would shift 'expectations' seem to have a lot of heavy lifting in front of them.

Japan's 30-year bonds rose, driving yields below 1 percent for the first time, on expectations among investors that yen gains will fuel deflation. Yields on five-year notes, 10- and 20-year bonds all fell to records on concern the yen's 2.1 percent gain against the dollar in the past month will slow exports and growth. ``I'm more bullish on bonds than I was a month ago,'' said Yoshiaki Murakawa, who manages the equivalent of $2.56 billion at SG Yamaichi Asset Management Co. ``The strengthening in the yen is good for bonds.'' ................The yen rose as high as 116.01 against the dollar yesterday, its strongest since July 24. A stronger yen pushes down import prices, adding to deflation and the value of bonds' fixed payments. It traded at 117.29 compared with 117.10 in late New York trading yesterday. The Bank of Japan on April 30 said it expects between 0.4 percent and 0.5 percent deflation in the fiscal year started April 1. Prices for consumer goods excluding fresh food haven't risen since April 1998...............

``Deflation will continue and investors will keep buying bonds,'' said Toshifumi Sugimoto, a general manager of investment trust marketing at Meiji Dresdner Asset Management Co., which manages the equivalent of $256 million in trust funds.Debt in the world's largest government bond market also gained after the government said yesterday its index of leading indicators fell below 50 percent for the first time since October, signaling an economic contraction may follow in three to six months. Japan has the largest government bond market in the world with 527 trillion yen in marketable securities, or $4.5 trillion, outstanding at the end of September, compared with the U.S. government's $3.1 trillion. The index, which measures job offers, consumer confidence and other signs of future activity, fell to 20 percent in March from 54.5 percent in February, the Cabinet Office said. ``It doesn't look like the economy is going to get better in the near future,'' said SG Yamaichi's Murakawa. ``There isn't anything on the horizon to push up bond yields.'' Michael Jansen, a market strategist at National Australia Bank, said in an interview on Bloomberg Television that 10-year yields may fall as low as 0.4 percent.
Source: Bloomberg
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