Japanese Bonds to Rally as Bank Deposits Increase, Mizuho Says

(Bloomberg) -- Japan’s 10-year government bonds will rally in coming months as a deepening recession boosts the amount of money held at banks, said Mizuho Securities Co.

Cash will pile up as households save more and companies refrain from borrowing, leaving banks with excess cash they are likely to park in government bonds, said Yasunari Ueno, chief market economist at Mizuho in Tokyo. Japan’s yield curve is set to flatten, with the gap between two- and 10-year bonds narrowing to the least since March, according to a weighted Bloomberg survey of analysts.

“Banks will have to buy 10-year bonds, which are attractive” compared to shorter-dated notes, Ueno said. “Deposits at banks are likely to increase, while demand for business funding declines. Sooner or later, banks will invest in government bonds as opposed to holding idle funds.”

Ten-year yields jumped 25 basis points this year, compared with an increase of half a basis point for two-year securities, according to data compiled by Bloomberg. The spread between the two will narrow to 88 basis points from its current level of 104.5 points, the Bloomberg survey showed. A basis point is 0.01 percentage point.

Ten-year yields advanced 1.5 basis points to 1.42 percent yesterday at Japan Bond Trading Co., the nation’s largest interdealer debt broker. A yield curve is a chart that plots the yields of bonds with the same quality but different maturities.

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