Anemic economic growth in the United States has sparked fears the country was entering a Japan-style “lost decade.” The comparison also has implications for government bond markets. Some traders see the U.S. Treasury market’s new, lower-yielding structure as eerily reminiscent of trading patterns seen in JGBs (Japanese government bonds). Says George Goncalves at Nomura:
There has been much debate since the start of the ’08 credit crisis over whether the US is turning into Japan and if so how to trade it. We have spent a fair deal of time over the last two years developing a framework for how US rates investors can leverage these insights to “Trading USTs like JGBs.” […] One thing is clear: momentum trading starts to wane and narrower ranges will become the norm in a low yielding world with the Fed on perma hold meanwhile a lack of alternative fixed income products is still forcing investors to buy USTs.
This does not mean that investors can remain permanently bullish on Treasuries, however, Goncalves warns.
Many accounts have now subscribed to the view that the UST markets are turning Japan-like, but we caution that as with all range-trading periods, buying at the lows in a range that is stretched is still a dangerous proposition. Look at the JGBs experience in 2003 for a warning to those calling for even lower USTs rates from here.