(2010-08-23) Japanese Bond Markets: Strathclyde Associates
“Strathclyde Associates”: Bond Markets - The Japanese bond market has remained uncha
“Strathclyde Associates”: Bond Markets - The Japanese bond market has remained unchanged over the past month.
Government bond markets have had a very traumatic month. The major markets have held fairly steady; but there have been dramatic falls in some of the minor markets, especially in Europe, after the decision by Standard and Poor’s to downgrade the level of Greek government debt to “junk” status.
The central banks are maintaining short-term interest rates at very low levels, and so the bond markets are continuing to receive some support. But this is being totally offset by the consequences of the massive fiscal deficits around the world that are placing enormous pressures on the bond markets.
The Greek situation remains in the eye of the storm, and has led to the decision to downgrade its debt to “junk” status despite a formal request for aid from the IMF and other member countries of the euro-zone to enable it to refinance its maturing debt and avoid a default. It is clear that the contagion is spreading to other members of the euro-zone, and so investors have continued to switch funds from the bond markets of the weaker countries and this has provided further support for the stronger markets.
A significant development has been the strength of the US market.
“Strathclyde Associates”: Bond Markets - The Japanese bond market has remained unchanged over the past month. The recovery from recession in continuing; but there are fears that the improvement is not sustainable, and so there is political pressure for new policies to counter deflation, to monetise the government debt, and to push the exchange rate sharply lower to encourage the export effort.
However the Japanese authorities have also been warned that they must prepare an aggressive plan to repair the fiscal position, or risk a downgrade in the country’s credit rating.
“Strathclyde Associates”: Bond Markets - Fitch Ratings has recently said, that “in the absence of sustained economic recovery and fiscal consolidation, government debt will continue to rise, placing downward pressure on sovereign credit and ratings over the medium term”.
This is the second time in less than six months that Fitch has expressed concern about the fiscal position; and Standard and Poor’s has also cut its outlook on Japan’s AA long-term rating to negative this year.
“Strathclyde Associates”: Bond Markets - So far these comments have been ignored, and Japanese institutional investors have continued to invest massive sums in the bond market. It is unlikely that this situation will change quickly, and so the Japanese government does not face the possibility of a sovereign debt default; but if no action is taken, and economic growth remains disappointing, it seems inevitable that the pressures must eventually push yields higher.
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