Japan U.S. Treasuries Repatriate Foreign Assets
Treasuries Slip on Japan Fears
The earthquake leads to reported and anticipated selling by Japanese investors of U.S. debt issues, as they seek to repatriate foreign assets.
By RANDALL W. FORSYTH
Ripples from the devastating earthquake in Japan extended to the U.S. Treasury securities market.
Prices slipped and yields rose Friday on reported and anticipated selling by Japanese investors of U.S. debt issues, part of a repatriation of foreign assets to help pay to rebuild after the magnitude-8.9 earthquake in northern Japan.
A major Japanese earthquake long has been a fear for the U.S. bond market. Japan is the second-largest holder of Treasury securities, with $882 billion at the end of 2010, following China’s $1.16 trillion, according to U.S. Treasury data. Japan incurred huge costs from the 1995 Kobe quake.
Japanese property-casualty insurers presumably would have to liquidate assets to pay claims, although they undoubtedly laid off some risks with reinsurers. For their part, major reinsurers face the third and biggest Pacific disaster in recent months, following floods in Queensland, Australia, and the earthquake in Christchurch, New Zealand’s second-largest city.
The major impact may be on the Japanese government-bond market, which may have to absorb major borrowing to rebuild. The benchmark 10-year JGB yield fell to 1.27% in a flight to safety after news of the quake, while the yen rallied on repatriation of foreign assets, to about 82 to the dollar.
But don’t assume that rebuilding efforts will stir Japan’s economy from its torpor. David Zervos, head of fixed-income strategy at Jefferies & Co., cites Austrian economist Ludwig von Mises in this regard: “The earthquake means good business for construction workers, and cholera improves the business of physicians, pharmacists and undertakers; but no one has for that reason yet sought to celebrate earthquakes and cholera as stimulators of the productive forces in the general interest.” The cost of the rebuilding will be paid by liquidating assets, such as U.S. Treasuries, or incurring new debts, through the issuance of JGBs, which will have to be repaid.
ANOTHER ERSTWHILE MAJOR holder of Treasuries, the Pimco Total Return Bond Fund, the world’s biggest mutual fund, run by Barron’s Roundtable member Bill Gross, was eschewing U.S. government paper other than the shortest maturities.
The reasoning was straightforward: The Federal Reserve’s program to buy $600 billion of Treasuries, aka QE2, has suppressed their yields to supernatural levels. When this artificial demand ends June 30, Gross reckons prices will fall, and yields will rise to their natural levels absent government intervention.
In an interview with Bloomberg television, Gross reckoned the 10-year Treasury ought to yield 4%, based on nominal gross-domestic-product growth in the 4%-to-5% range. “We’re being underrewarded…now at 3.5%, and so [moving] into other markets is Pimco’s favored direction,” he said. The 10-year note yield ended Friday at 3.40%, down from 3.49% a week earlier, even after absorbing a heavy slate of Treasury-note auctions over the course of the week.
As it happens, 4% also is the top of the range against which the benchmark 10-year yield has bumped, most recently in early April 2010. After that, it fell sharply, to 2.5% by August, when Fed Chairman Ben Bernanke indicated the central bank would resume purchases of Treasuries as the economy appeared to falter. Ironically, their yields are up substantially since then.
The Federal Open Market Committee this week will deliberate over its monetary-policy options, most notably how to deal with the end of QE2. It is all but certain the Fed will purchase the full $600 billion of securities, as planned, but it could wind down the program more gradually past the currently contemplated June 30 end.
The panel also could ponder the wording of its policy directive, which says it intends to keep the federal-funds rate target—a rock-bottom 0-0.25%—at “extraordinarily low” levels for an “extended period.” In other words, it could indicate that the ultra-easy policy may come to an end.