Analyst: Japanese Bond Market is a “Must Watch” for U.S. Investors

U.S. Investors

10-Year Japanese Government Bond Yielding -0.09%

New York, NY — With increased uncertainty around the world, it’s not really big news that some foreign government bonds are yielding negative. However, several analysts recently pointed out how yields on Japanese government bonds could matter to investors in the U.S.

Since February, yield on Japanese 10-year government bonds has been in the negative territory. Most recently, it started to climb back up. On Tuesday August 9, yield on 10-year Japanese government bonds have climbed to just negative 0.09%, up quite a bit from negative 0.29% at the end of July.

Interest rate analysts have weighted in on the matter. Independent rates strategist Ian Lyngen wrote Tuesday that the recent move in Japanese bond yield has “provided an offset to what has been meaningful bullish support for Treasuries.” (Source: “Why Japanese 10-Year Yields Near Zero Matter to US Investors,” Barron’s, August 9, 2016.)

The idea is that lower yields on foreign government bonds have been a catalyst behind the rally in U.S. Treasuries. When Japanese bonds are yielding negative, Japanese investors might want to take a look at what U.S. Treasuries are offering. When you take into account the cost of currency hedging, the yields on Japan’s bonds and U.S. bonds are roughly the same right now.

In a note on Tuesday morning, Strategas Research Partners refers to the move in Japanese government bond yields as “the big macro story.” Also, analyst Peter Boockvar of The Lindsey Group wrote that the Japanese bond market is a “must daily watch.” (Source: Ibid.)

In particular, Boockvar wrote that he believes the Bank of Japan will not be going further into its negative interest rate policy. He has always held that view. Earlier this year, Boockvar said in an interview with CNBC that adopting negative interest rates is an “economic kamikaze.” (Source: “Bank of Japan’s Negative Rates Are ‘Economic Kamikaze,’” CNBC, January 29, 2016.)

In the U.S., government bonds strengthened modestly on Tuesday. Yield on the benchmark 10-year Treasury note fell to 1.540%.

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