If we’re Japan then the rates on 10-year US treasuries will be around 1% in a decade, right?
Maybe, but then, maybe we’re not actually Japan.
George Goncalves at Nomura offers four reasons why not:
Although the timeline of Japan’s crisis appears eerily similar to the US, there are significant differences as well. There was a credit bubble for both countries and it’s true that the basic similarity in rates markets is that US rates appear to be range- bound, just as Japanese rates have been for over a decade.
Differences, though, are plenty:
–The US seems to be progressing through its crisis faster than Japan.
–While the US has structural economic problems, the severity of Japan’s demographics (ageing population) appears to be a much larger problem.
–The rollover risk for Japanese debt is also higher than that for the US (requiring perma-hold rates from the BoJ). Meanwhile, the US is extending the maturity of its debt to mitigate this rollover risk.
–Finally, although in a stable range, we theorize that the ―floor‖ for US debt in yield terms is higher than in JGBs because a significant portion of the debt is owned by foreign buyers, which will require a rate premium.
All that being said, based on the Japan path, the Treasury rally could stall out right about now.
These two charts tell that story. First Japan, which entered its range bound market around the year 2000.
And then the U — though at higher rates — may soon enter the same channel.
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