Category Archives: Bonds

Japan’s debt approaches 1 quadrillion yen

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Debt approaching 1 quadrillion, and the highest as a % of GDP anywhere I know of, and still no bond vigilantes in sight!

Who would have thought???

Not to mention decades of 0 rates, massive QE, and in general the BOJ trying as hard as it can to inflate.

Maybe it’s not all that easy for a CB to cause inflation???

Anyway, net fiscal will add a bit to GDP, but nothing serious, and the hawkish rhetoric doesn’t seem to have changed any.

And note the cuts in welfare ‘paying for’ the increases in defense and infrastructure.

Of the Y92.6 trillion yen in spending, Y43.1 trillion will be financed with tax revenues and Y42.9 trillion with issuance of new bonds, adding to Japan’s massive public sector debt that already totals nearly Y1 quadrillion.

The FY2013 budget does show clear differences from those of the previous DPJ administration, with a clear shift away from social welfare toward defense and infrastructure programs.


It calls for a reduction of Y67 billion in welfare benefits over the next three years, an increase of Y712 billion, or 15.6% in public works programs and a Y35 billion, or 0.8% increase in spending for the Self-Defense Forces.

“Adequate amounts have been provided to ensure the safety of public infrastructure and to address public concerns about national defense,” Mr. Aso said.

The LDP’s call for aggressive public works spending got better reception after the collapse of an expressway tunnel in December that killed nine people. Simmering tensions with China have also increased support for spending programs to improve security of Japanese territory.

In a policy address Monday, Mr. Abe vowed to erase fiscal deficits in the medium-to-long term, but stopped short of saying when, leaving the task to his economic advisory panel.

Sayuri Kawamura, a Japan Research Institute economist, is worried that not enough attention has been given to the risk of fiscal implosion.

“As debt piles up, the cost of servicing that debt also goes up, eating deeper into tax revenue, and leaving less and less for policy programs. The government hasn’t explained how they are going to deal with this challenge,” Ms. Kawamura said.

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No ‘Massive Mark to Market’ Event for Bonds This Year: Friesen

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No ‘Massive Mark to Market’ Event for Bonds This Year: Friesen

By Madeleine Lim

Jan. 23 (Bloomberg) — While “shortage of yield” will provide support for stocks, unlikely to see “great rotation” out of USTs and investment-grade bonds this year, III Associates principal and Co-CIO Garth Friesen said in interview yesterday.

Growth set to be sluggish in major economies, earnings growth expected to slow down, driven by contractionary fiscal policies, particularly in Europe; tight fiscal policies likely in place for foreseeable future; supportive of fixed income

Central bank policy in major developed economies to remain highly accommodative,

With real yields negative across all maturities and central banks taking yield out of market, demand rising for carry-oriented investments; favors higher-rated HY, structured credit

While 10Y yields could rise another 25bps-50bps, sharp rise in UST yields unlikely as Fed purchases to support long end, while front end anchored by low-rate commitment; with thresholds unlikely to be breached this year or next, Fed to remain on hold

Bear markets in fixed income typically prompted by Fed policy tightening

Still some debate whether halt or curtailment of Fed asset purchases presents tightening; flow of purchases important to markets

Fed balance sheet not a near-term risk; balance sheet is a tool for Fed, which would only shrink balance sheet for policy purposes; given outlook for muted inflation, Fed not operating under time constraints


III has $2.3b in AUM, three lines: fixed income arbitrage, long-short credit, tail hedging business; mostly in G3/G7 currencies

Euro investments in swaps, funding markets, less exposure to sovereigns; credit exposure mainly U.S., some euro exposure

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Cliff notes

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Jobless Claims Fell More Than Expected, Down by 25,000 to 370,000

I haven’t written much this week because I haven’t seen much to write about.

Still looks like both the economy and the markets are discounting the cliff. And still looks to me like ex cliff GDP would be growing at about 4% this quarter, with the Sandy-cliff related cutbacks keeping that down to maybe 2.5%. And going over the full cliff is taking off maybe 2% more, leaving GDP modestly positive.

Which is what stocks and bonds seem to be fully discounting.

As previously discussed, the housing cycle seems to have turned up, which looks to be an extended, multi year upturn with a massive ‘housing output gap’ to be filled. And employment is modestly improving as well, also with a large output gap to fill. Car sales are back over 15 million, and also with a large output gap to fill.

The way I see the politics unfolding, the full cliff will be avoided, if not in advance shortly afterwards, as fully discussed to a fault by the media. That means GDP growth head back towards 4% (and maybe more)

Nor do I see anything catastrophic happening in the euro zone. They continue to ‘do what it takes’ to keep everyone funded and away from default. And conditionality means continued weakness. Q3 GDP was down .1%, a modest improvement from down .2% in Q2, and a flat Q4 wouldn’t surprise me. The rising deficits from ‘automatic fiscal stabilizers’ (rising transfer payments and falling revenues) have increased deficits to the point where they can sustain what’s left of demand. And the recent report of German exports to the euro zone rising at 3.5% maybe indicating that the overall support for GDP will continue to come disproportionately from Germany. And rising net exports from the euro zone will continue to cause the euro to firm to the point of ‘rebalance’ which should mean a much firmer euro. And as part of that story, Japan may be buying euro to support it’s exports to the euro zone, as per the prior ‘Trojan Horse’ discussions, and as evidenced by the yen weakening vs the euro, also as previously discussed.

And you’d think with every forecaster telling the politicians that tax hikes and spending cuts- deficit reduction- causing GDP to be revised down and unemployment up, and the reverse- tax cuts and spending hikes causing upward GDP revisions and lower unemployment- they’d finally figure this thing out and act accordingly?

Probably not…

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China hates QE

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This was my suspicion back in maybe May, 2011 when Bernanke made his strong dollar speech after China had let their T bill portfolio run off after the Fed had begun QE1.

Either China doesn’t understand QE or they are taking this position anyway, for further political purpose.

And in any case, in general they all remain blind to the fact that imports are real benefits and exports real costs.

China dismisses Brazil currency proposal at WTO, criticizes QE

By Tom Miles

Nov 26 (Reuters) — China blamed quantitative easing for damaging emerging economies and rejected Brazil’s proposal of using world trade rules to compensate for currency misalignments, during a debate at the WTO on Monday.

“We, together with many other countries, have been critics of this irresponsible and beggar-thy-neighbor policy,” China’s deputy permanent representative to the World Trade Organization, Zhu Hong, said, referring to the monetary stimulus policy often shortened to QE.

“It has a lingering negative impact on developing, emerging economies in particular,” Zhu said during a debate on currency fluctuations at the WTO in Geneva, according to a transcript provided by a Chinese official.

The meeting was called to discuss Brazil’s proposal that WTO rules should include a system for dealing with currency misalignments.

Brazil’s Ambassador Roberto Azevedo, who some trade diplomats say is a contender to replace WTO chief Pascal Lamy when he steps down next year, has gradually hardened up his demands on the issue.

After getting WTO members to agree to examine the available literature on the subject last year,Brazil circulated a proposal on November 5, explaining that WTO rules contained language about dealing with currency-related trade distortions but no adequate instruments to act directly.

“The WTO seems to be systemically ill-equipped to cope with the challenges posed by the macro and microeconomic effects of exchange rates on trade,” Brazil said in its proposal, a copy of which was obtained by Reuters.

“Members may wish, against this background, to consider the need for exchange-rate trade remedies and to start some analytical work to that effect.”

The proposal did not mention quantitative easing and explicitly called for analysis “from a systemic perspective” rather than from any one country’s experience.

But it was accompanied by a graph showing the estimated misalignment of Brazil’s own currency, the real, with an over-valuation of nearly 40 percent in 2011.

Brazil has previously called quantitative easing, a form of monetary stimulus, “selfish” and blamed it for stealing exports from emerging markets.

But China’s Zhu said the issue was one for the International Monetary Fund, not the WTO.

“Currency issue in nature is a monetary policy issue. The right path to resolve this issue is by enhancing the responsibility of and promoting coordination among the international reserve currency issuers,” Zhu said.

BAD PRECEDENT

Brazil’s push for the WTO to take up the currency proposal has rolled onward despite struggling to gain vocal support, partly because it is unclear if such an idea would be workable in practice.

Donald Kohn, a former vice chairman of the Federal Reserve and a member of the Bank of England’s Financial Policy Committee, said that although he was not familiar with the proposal, such ideas did not make sense from an economic point of view in general.

“Emerging market economies should adapt, and they should change regulation to allow their exchange rates to be more flexible where that’s appropriate,” he told Reuters after giving a speech in Geneva earlier this month.

“But I think it’s not going to work and I think it’s unproductive to ask the industrial economies to do things that are not in their self-interest, within the rules of the game. Secondly, if what they’re talking about is tightening up on trade and restricting trade, that’s a very bad precedent.”

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QE follow up

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It’s been about a week, and the initial reactions are already wearing off and markets settling in.

The lasting effects are those of the income lost to the economy as the Fed earns the interest on the securities it buys instead of the economy. This reduces the federal deficit and is a ‘contractionary’ force. At the same time the Fed removes securities/duration/convexity/vol from the economy which tends to lower the term structure of risk free rates some and further reduce volatility as well.

Initially the long end sold off on the presumption that QE works to lower the output gap/restore growth and employment, which means the Fed would, down the road, be hiking rates in response to the improving economy.

However, as the reality that QE doesn’t work to support aggregate demand sinks in, long end yields can come down on the anticipation that future growth prospects are not good, increasing the odds that the Fed will be keeping rates low that much longer.

Likewise, it’s a mixed bag for stocks, though overall modestly supportive. QE doesn’t improve earnings prospects, and serves to keep growth down, but the lower interest rates help valuations, and high unemployment along with productivity increases work to keep unit labor costs down.

Europe has solved the solvency issue, but it’s all conditional on bringing deficits down, and so far it looks like they are all working to keep doing exactly that, and with no prospects for material private sector credit expansion or export growth,
GDP can continue to be negative.

Then there’s the US fiscal cliff. Everyone agrees deficit reduction slows things down, which is why they say we shouldn’t do it now. But they also therefore know it will slow down things whenever they do it in the future. So how hard should it be to come to recognize that slowing things down is actually the point of deficit reduction, and is appropriate only for that reason? Apparently it’s impossible. And the fiscal cliff is already taking its toll as anticipated contracts for next year along with purchases are being delayed.

So without some kind of fiscal paradigm shift I don’t see much good happening, and even the muddle through scenario is now at risk.

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Asmussen statement

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>   
>   (email exchange)
>   
>   On Wed, Aug 22, 2012 at 3:02 AM, wrote:
>   
>   You are totally right about him, I sent you a word doc with his exact words
>   (emphasis mine)
>   

Repeat: Asmussen: ECB Wants To Eliminate Doubts About Euro
2012-08-20 05:36:05.371 GMT

–First Ran On Mainwire At 2257 GMT/1857 ET Sunday


FRANKFURT (MNI) – The European Central Bank wants to remove any doubt about the permanence of the common currency, ECB Executive Board member Joerg Asmussen said in a newspaper interview published in Monday’s edition of the German daily Frankfurter Rundschau.

The German board member told the paper that financial market certainty regarding the continued existence of the euro was a necessary condition for the currency’s stability.

The ECB’s planned new bond-buying program is superior to its predecessor, the Securities Market Program, and the Governing Council will work on details at its next meeting, Asmussen said.

Noting the high risk premia for some sovereign bonds in the euro area, which he said were in part due to concerns about the reversibility of the euro, Asmussen said that such an exchange rate risk was theoretically not admissible in a currency union and was leading to the incomplete transmission of ECB monetary policy to some euro area economies.

“Our measures attempt to repair this defect in the monetary policy transmission mechanism,” he said. The worries about the euro’s permanence are no wonder, he added, given “how carelessly” the currency is talked about in Europe.

“It is precisely these concerns about the continued existence of the euro that we want to rid market participants of,” he said.

Asmussen asserted that the ECB is acting within its mandate, adding that “a currency can only be stable if there is no doubt about its existence.”

The new bond-buying program meant to address this issue “will be better conceived” than the SMP, he said, repeating that the ECB will only act in tandem with the EFSF or ESM and that interested countries must submit a request and satisfy “comprehensive economic policy conditions.”

The ECB’s Governing Council “will decide in complete independence whether, when and how bonds are purchased on the secondary market,” he added.

What happened last summer with Italy, which failed to use the time bought by ECB bond purchases to make necessary adjustments, cannot be allowed to happen again, he said.

Moreover, in the new program the ECB will deal with the problem of senior status, which interferes with affected countries’ return to capital markets because private investors fear being disadvantaged vis-a-vis the ECB, he said.

Asked if the new program could be successful because it will be unlimited in time and scope, Asmussen confirmed that ECB President Mario Draghi had said as much.

“But wait and see,” he said. “We are working on the design of the new program and will occupy ourselves with these questions in our next meeting.”

Credit and money growth in the euro area are “moderate,” and “inflation expectations in the entire Eurozone are firmly anchored to our target,” he said. “We are monitoring price developments very closely and have all the necessary instruments to fight possible inflationary dangers effectively and in a timely manner.”

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MMT on the immediate restoration of the US’s AAA rating

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Not that it matters, of course, but all’s that’s needed is for the Fed to guarantee that all US obligations mature at 100. The Fed is fully authorized to buy US tsy securities and can certainly buy them at maturity value on their maturity date, simply by crediting the appropriate accounts. And the ratings agencies fully recognize that authority.

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ECB August Meeting

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Not to forget this is the just the beginning of ‘doing what it takes’ to sustain the euro, and make it ‘safe’ for investors.

That’s all inclusive, though not necessarily immediate.

And ‘anchoring’ the short end ‘automatically’ goes a very long way towards anchoring the long end with regard to risk premium.


Karim writes:

Draghi announced significant philosophical changes today. The key announcements were:

  • The ECB was ready to renounce seniority on its bond purchases.
  • The size of future purchases was open-ended: ‘size adequate to reach its objectives’.
  • Future purchases may not be sterilized, as they have been with the SMP so far.
  • Purchases would be front-end focused as that ‘falls squarely in line with monetary policy instruments’. A key instrument is obviously the LTROs. So would imagine purchases would be 3yrs and in on the curve.

The adherence of governments to their commitments and the fulfilment by the EFSF/ESM of their role are necessary conditions [for some action on the ECB side]. The Governing Council, within its mandate to maintain price stability over the medium term and in observance of its independence in determining monetary policy, may undertake outright open market operations of a size adequate to reach its objective. In this context, the concerns of private investors about seniority will be addressed.

Other news was that:

  • As in the excerpt above, purchases would be subject to strict conditionality via the EFSF (i.e., Spain has to accept a Memorandum of Understanding). Fiscal consolidation and structural reform were listed as the key conditions.
  • He threw cold water on the ESM getting a banking license, saying he was ‘surprised by the attention this has received’.
  • Logistics and objectives on bond purchases were TBD by a committee.
  • Further non-standard measures were forthcoming.
  • Rate cuts were discussed but unanimously voted down; as for a negative depo rate he said ‘we are in unchartered waters’, implying the hurdle may be high.

Relative to levels before Draghi’s London speech last week, Spanish 2y yields are 200bps lower, and 10yr yields are 50bps lower.

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