Japan Spirals into Bankruptcy?

And for what it's worth (probably not much at all), here is the latest ratings action from Moodys:

http://www.zerohedge.com/article/moodys-changes-japans-aa2-rating-outlook-negative-stable

Title: "Moody's Changes Japan's Aa2 Rating Outlook To Negative From Stable"

Moody's Investors Service has today changed the outlook on the Government of Japan's Aa2 rating to negative from stable.

http://www.bloomberg.com/news/2011-...g-outlook-changed-to-negative-by-moody-s.html

Japan’s credit rating outlook was changed to negative from stable by Moody’s Investors Service on the risk that the government won’t do enough to tackle the nation’s debt burden.

 

With the benefit of hindsight, I should have gone long CHF/JPY instead of long USD/JPY. However my long USD/JPY position is quite small and I won't add to the position while JPY continues to be strong against USD in "risk-off" situations.

Swiss 10 year yield:
http://noir.bloomberg.com/apps/quote?ticker=GSWISS10:IND

Big list of links to government bond quotes and charts on Bloomberg:
http://forum.stocks.ch/forum/g-t357283?page=1024

 

Well, this is the interesting bit... The curve steepens only until default is a remote possibility and it's all about duration/interest rate. As the mkt starts pricing an actual default and a sovereign starts trading like credit, the curve actually inverts sharply. You can see this if you look at what happened with GGBs (Greek guvvies), whe 2s10s is smth like 250bps inverted. It's quite an interesting dynamic, actually.

 

Thanks for the feedback Martinghoul.

I am wondering if the situation you described (curve inverts sharply) would also be the case in a (yet-to-happen) "pricing in Japanese default" situation. Because as you know, Greece doesn't have the independence / power to print away its debt obligations, whereas Japan can choose that 'method' of repayment.

So for example, if the market did assign a high possibility that Japan was having difficulty meeting debt obligations, could the 2s/10s steepen, to allow for the higher high inflation / hyperinflation risk of 10s, when 2s only have 2 years of this risk?

In any case, I'm not sure that this matters too much. I think I understand currencies better than I do bonds, so my weapon of choice for the "Japan Kyle Bass trade" is USD/JPY and maybe CHF/JPY.

As I watch CHF make an all time high against USD below 0.9300, and CHF/JPY doing nicely at 88.63.

 

This caught my attention! Why inverted? I would have thought the longer you hold Greek debt, the more likely a default. Why are investors not buying short term Greek debt if they can get a higher yield with less risk?

Is it related to ECB buying operations further down the curve?
Or pension funds have to hold a longer duration to match liabilities?

How long has 2y10y GGB been inverted and are you seeing the same pattern in Portgual and Spain or other countries?

Thanks in advance Martinghoul!

 

Well, it's not really about the ECB... It's a standard rates-->credit dynamic, as far as I know. High-quality credit (be it corp or sov) is mainly about duration, which means that, in terms of notional, you need more of the shorter-dated paper to get the same exposure. As things start looking shaky, duration starts becoming increasingly irrelevant and it's all about the total all-in amount, which means that the paper you wanted more of in the past, you want a lot less of. That's when the curve inverts. Indeed this is why, as far as I know, IG corp curves are normally steep and get increasingly flatter as quality decreases. It also makes sense intuitively. Maybe one of the credit bods like sjfan that come here every now and then can shed more light.

And in EUR, the only one that's properly inverted is Greece. Ireland is close, while Spain and Portugal aren't. This may be due to the rescue mechanism, which is now in place, but isn't likely to help Greece. See attachment (first one is Greece, second is Ireland).

 

GPIF Worried About Japan's Public Debt?

When Takahiro Mitani, Chairman of Japan's $1.4 trillion Government Pension Investment Fund (GPIF) expresses concern over his country's mounting public debt, you'd better pay attention...

Japan's $1.4 trillion Government Pension Investment Fund (GPIF), the world's largest pension fund, warned the country needs to resolve its debt problems, although, for now, it is sticking to its basic investment strategy.

GPIF Chairman Takahiro Mitani said in an interview with Reuters that Japan's bulging public debt -- the largest among developed countries at double the size of its $5 trillion economy -- would reach a crucial point in five to 10 years if the problem is not resolved.

The GPIF, whose asset size is larger than both the Canadian and Indian economies, is a major force in the Japanese government bonds (JGB) market, where it parks two-thirds of its assets.

The GPIF plans to diversify its portfolio, however, by investing in emerging markets, where its hopes to start channeling funds in the financial year that starts in April.

http://www.zerohedge.com/article/gpif-worried-about-japans-public-debt

 

A blast from the past:

http://www.independent.co.uk/news/business/japans-debt-downgraded-as-yen-dives-1154414.html

Japan's debt downgraded as yen dives
Richard Lloyd Parry in Tokyo and Diane Coyle in London
Saturday, 4 April 1998

 

Bloomberg: World’s Biggest Pension Fund ‘Will Likely’ Sell Japan Bonds

Japan’s public pension fund, the world’s largest, said it may become a net seller of bonds to cover payments in the world’s most rapidly aging society.

The Government Pension Investment Fund, which oversees 117.6 trillion yen ($1.4 trillion), in September forecast that it would sell 4 trillion yen in assets in the business year ending March 31 to fund payouts. Sales may be less than that in the year starting April as bonds reach maturity, said Takahiro Mitani, president of the fund, known as GPIF.

“We will likely be a net seller in the market,” Mitani, a former executive director at the Bank of Japan, said in an interview in Tokyo yesterday. “We certainly have to come up with an adequate amount” to pay pensions, he said, declining to elaborate on the amount.

Sales by the fund, which helps oversee public pension funds for Japan’s 37 million retirees, come as the first of Japan’s baby boomers is set to turn 65 in 2012, making them eligible for pension payments. In the year ended March 2010, GPIF raised 720 billion yen in part through selling assets to fund the payouts. Almost 40 percent of Japan’s population will be older than retirement age in 2050, according to the statistics office.

The GPIF, historically one of the biggest buyers of Japanese debt, held 82.4 trillion yen in domestic bonds, or 70 percent of its assets, as of September, according to the fund’s latest quarterly financial statement. That compares with 12.6 trillion yen in Japanese stocks, or 10.7 percent, 9.6 trillion yen, or 8.2 percent, in foreign bonds and 11.5 trillion yen, or 9.7 percent, in overseas stocks, the report shows.

‘Need to Sell’

http://www.bloomberg.com/news/2011-...l-likely-be-net-seller-of-japanese-bonds.html

 

4 Trillion yen is 40,000 JGBs over 252 trading days or 769 JGB sells on average per week. Daily volume is between 20k-40k.