From Bloomberg:
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Japan's long deflationary period is still hanging on after 20 years. Bonds pay pathetic rates - 1.15% for 10 years. If investors lose confidence in the government it would not take much movement in yields to trigger a bond market collapse. If 10 year yields were to spike up to 2.3% - bonds would lose 50% of their value. Who knows what could trigger such a loss of confidence, but even zombie banks eventually go bust, and Japan has many zombie institutions.
Japanese bonds completed a third weekly loss after data showed producer prices avoided declines for a second month and on prospects debt issuance will increase under a government led by Ichiro Ozawa.
Bonds also dropped after the government said Japan’s economy grew at a faster pace in the second quarter than initially estimated, and U.S. data showed the trade deficit narrowed and filings for jobless benefits declined.Ozawa is challenging Prime Minister Naoto Kan at the ruling party’s leadership election on Sept. 14.
“The report on producer prices reflects resilience in the commodity market, which may spur expectations that deflationary pressures will ease,” said Ayako Sera, a strategist who helps oversee $310 billion at Sumitomo Trust & Banking Co. in Tokyo.
The yield on the five-year note increased 3.5 basis points to 0.345 percent last week in Tokyo at Japan Bond Trading Co., the nation’s largest interdealer debt broker. The 0.3 percent security due June 2015 fell 0.163 yen to 99.789 yen. Benchmark 10-year yields rose half a basis point to 1.15 percent.
The decline in bonds was tempered as Incubator Bank of Japan Ltd. declared bankruptcy, triggering the government’s 10 million yen government deposit insurance cap for the first time in 40 years.
The closely held, small-business lender has about 3,300 depositors with more than 10 million yen, Financial Services Minister Shozaburo Jimi said at a press conference yesterday.
“I’m paying close attention to whether the bankruptcy of Incubator Bank will trigger concern about Japan’s financial system among overseas investors” and spur demand for bonds, Sumitomo’s Sera said.
Yields jumped almost a third of a percentage point to as high as 1.195 percent in the weeks following Ozawa’s Aug. 26 announcement that he would challenge Kan.
“The ‘Ozawa shock’ prompted a rush of bond selling, causing yields to surge at an unexpected pace,” said Satoshi Yamada, fixed-income trading manager in Tokyo at Okasan Asset Management Co.
Comments:
Japan's long deflationary period is still hanging on after 20 years. Bonds pay pathetic rates - 1.15% for 10 years. If investors lose confidence in the government it would not take much movement in yields to trigger a bond market collapse. If 10 year yields were to spike up to 2.3% - bonds would lose 50% of their value. Who knows what could trigger such a loss of confidence, but even zombie banks eventually go bust, and Japan has many zombie institutions.
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