Yusuke Ito knows all about the follies of inflation hawks.
The senior fund manager at Tokyo-based Mizuho Asset Management watched Japan stagnate for years as the economy was beset by deflation.
Now, Ito is betting something similar may happen in the U.S. as the Federal Reserve prepares to raise interest rates for the first time in almost a decade. Deflation — not inflation — is the risk for policy makers, and will be for years, he says.
The Fed, in other words, may be getting ahead of itself.
“It’s going to be premature,” Ito, who helps manage $28 billion at Mizuho, says of the Fed’s expected move. Odds are, the Fed might have to reverse course if it raises rates in September or even December, as most economists predict.
As a result, Ito says Mizuho has loaded up on the longest-maturity Treasuries, which tend to do the best when the economy is down and inflation is subdued. Mizuho is among the money managers from Japan that have added almost $40 billion of interest-bearing U.S. bonds this year, data compiled by the Ministry of Finance. That’s the most since 2010.
And where they choose to put their money matters because Japanese investors hold $1.2 trillion of U.S. government debt, more than any other country apart from China.
Betting on Treasuries might sound risky at a time when the resurgent job market has the Fed moving to raise borrowing costs, but the bond market is already bracing for the likelihood that deflation will emerge in the coming year.
Traders see consumer prices falling 1.45 percent in the next 12 months, the weakest outlook since February 2009, when the U.S. was still mired in its worst contraction since the Great Depression.
Longer-term expectations paint a similarly bleak picture, with bond traders questioning whether inflation will reach the Fed’s 2 percent goal at any time over the next decade.
One reason consumer prices have barely budged this year is that Americans can’t seem to get the pay raises to enable them to spend more. In 2015, hourly earnings have risen just 0.2 percent on a monthly basis.
Since the recession ended, wages have climbed an average of 2.1 percent annually, the weakest in any expansion since at least the 1960s, data compiled by Bloomberg show.
Another issue is the plunge in oil, which has fallen from more than $100 a barrel last year to below $40 on Monday. That also spurred futures traders to reduce their bets on Fed rate increases.
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