This is not your typical Japanese government bond post.
After Friday’s almighty earthquake, Japanese government bond futures rallied (the cash market was closed immediately after the event), reportedly on safe haven demand. But there’s still plenty of JGB bearishness around too — with worries that new liquidity measures and the cost of rebuilding could eat into Japan’s finances.
So here’s that rather different (and bearish) JGB view.
It comes from Bank of America Merrill Lynch rate strategist, Bin Gao, who’s been talking about supply/demand imbalances in the JGB market for a while now… :
The JGB may get heavy on demand supply tips. After the initial JGB rally on the flight to quality, the fundamental concern remains for the supply-demand imbalance. It is arguably worse now than it was before the earthquake. The megabanks position in JGB remains heavy and the cash on their balance sheet light. Such a position potentially magnifies bearish moves in JGBs. Several factors favor such a move, although the final quake costs will affect the outcome significantly.
- * Companies were the major source of deposit growth for banks, which in turn bought JGBs. The lack of power and the disruption to the production of upstream auto and electronic products in the hard hit northeast area will likely impact the corporate cash build up down the road.
- * Insurance companies have enough reserves in catastrophe loss-reserves (estimated at ¥1tn at March 2010), but they need to sell-assets which will add pressure to the bond market. To make the situation worse, insurance companies’ holding of JGBs has steadily climbed from 32% to 42% of their asset portfolio, and the average duration has also gotten longer.
- * The government budget is already in a dire shape with JGB issuance higher than the tax revenue. Any help from the fiscal side will worsen market fears on Japan’s debt concern. Furthermore, if the insurance cost runs higher than ¥1.2tn, the government will have to bear a additional cost up to ¥5.5tn, further threatening the market with higher JGB supplies.
The wild card sits in BoJ’s hand. The BoJ looks like the only party which can provide the needed support for JGBs if rates shoot higher down the road…
The Bank of Japan has just enlarged its asset-buying programme to ¥10,000bn, according to Bloomberg. It also has a ¥1,800bn target for monthly bond purchases separate to the asset-buying programme, and has offered to buy ¥3,000bn worth of government bonds from lenders in repurchase agreements starting March 16.
Those are some big numbers — but are they big enough to mitigate this?
Related links:
Quake costs threaten to extend bondbear market - Bloomberg
JGB 30-year yield rises 7 bps after earthquake - Reuters