Yield-Hungry Japanese Investors See End-of-Year Swap Price Hike

Yes, Japan has negative sovereign debt yields for maturies of less than 9 years.

And now this:

(Bloomberg) — The year-end cost for Japanese investors to borrow dollars with forward swaps is near the highest since the 2008 crisis.

The search for yield has driven Japanese investors to load up on U.S. bonds, exchanging yen for dollars using cross-currency forward swaps. Such activity can create a demand-supply imbalance, especially at financial reporting dates like year-end.

Merry Christmas from Nakatomi Plaza!


My Kuroda! Japanese Foreign Assets Top One Quadrillion For First Time (Japan Has Zero Inflation)

With Bank of Japan rates so low, Japanese corporations and individuals have to seek yield in foreign assets.


Bank of Japan has helped push their sovereign yield curve down over 140 basis points since December 1, 2007 at the 10 year tenor. Japan’s sovereign yield continues to be negative at maturities of less than 9 years, prompting investors to seek yield shelter outside of Japan.


The result? Japan’s EXTERNAL assets have skyrocketed since BoJ began slamming down the yield curve in late 2007.


The U.S. holds more external assets than any other country, $23 trillion worth, according to the International Monetary Fund. But in terms of growth, Japan is far-outpacing the U.S. and other leading economies. U.S. foreign asset growth came in at less than 10% over the five-year span. Foreign assets held by Germany and France shrank during the same period.

Of course, Japan is currently experiencing zero inflation despite the massive incursion into financial markets by the Bank of Japan.


This is not surprising giving the forecast of a shrinking Japanese population.


My Kuroda!


Central Banks And Housing Prices: A Tale Of Three Countries (US, Germany and Japan)

23 t4The US Federal Reserve, the European Central Bank (ECB) and Bank of Japan (BOJ) have all been hyper-active in recent decades. But the low-rate policies have not produced the same outcomes.

The US, after home prices declined in 2008 and 2009, took a while to recover. Only in 2012 did US home prices begin to rise again.


Germany’s house prices also fell, but started rising again in 2010.


Japan is a different story. Despite staggering increases in asset purchases by the BOJ (and negative lending rates), Japan has experienced a decline in housing prices.


So, The Fed’s Yellen, ECB’s Draghi and BOJ’s Kuroda have had different easing experiences.

My Kuroda! 


ECB And Draghi Keep Rates At Zero, Downgrades 2018 Inflation To 1.2% (To Infinity … And Beyond!)

The European Central Bank (ECB) President Mario Draghi is mimicking Buzz Lightyear from Pixar’s Toy Story: “To Infinity and Beyond!” That is, Draghi announced today that the ECB is keeping their key rates at 0%, 0.25% and -0.40%.

At today’s meeting the Governing Council of the ECB decided that the interest rate on the main refinancing operations and the interest rates on the marginal lending facility and the deposit facility will remain unchanged at 0.00%, 0.25% and -0.40% respectively. The Governing Council expects the key ECB interest rates to remain at their present levels for an extended period of time, and well past the horizon of the net asset purchases.


And like the US, the measured inflation rate in the Gyrozone is forecast to be 1.2% in 2018 and 1.5% in 2019.


Of course, “Super Mario” thinks everything is beautiful in the European Zone. Although of the big three (Germany, UK and France), only Germany has YoY GDP growth of over 2%.


The good news? The number of EMEA (Europe, Middle East, Africa) countries with negative 2 year sovereign yields stayed at 19.


But the Central Banks are engaged in a monetary form of “Dueling Banjos”


Or as Mario Draghi says, “To infinity … and beyond!” for ECB monetary policy.

Infinity and Beyond

US Debt Ceiling, The Wall, Runaway Spending And The Lack Of Evidence Of Concern … So Far (Low US CDS)

The US Statutory Debt Limit, a failed tool to halt the endless growth of Federal debt issuance, is once again in play at nearly $20 trillion. It was only at $6 trillion in 2002.


The problem, of course, is runaway Fed spending which is currently at around twice that of Federal current tax receipts, requiring that the deficit be funded by issuing Federal debt (or raising taxes and/or cutting Federal spending).


The staggering increase in Federal debt starting in 2007 also resulted in a large spike in public debt to GDP.


The US has joined the European PIGs (Portugal, Italy, Greece, as well as Cyprus and Belgium) in having debt as a percentage of GDP being over 100%. The fourth debt piggie is Spain at 99.40% debt to GDP.


The core problem with Federal spending, now and in the future, is mandatory (entitlement) spending.


Of the entitlement spending, Medicare is growing at an unsustainable rate (although Medicaid growth is no slouch either).


So we are on an ussustainable track in terms of spending. How does “the wall” with Mexico fit it? It could be funded with more taxation, or spending cuts on other programs. Democrats LOVE raising taxes, but not to build a wall. Republicans are split on building a wall (open border freemarketeers versus those with national security concerns).

My colleagues at my former employer Deutsche Bank have attempted to lay out possible funding scenarios. Although I think the odds of deep spending cuts is about as likely as North Korea embracing personal freedom and capitalism.

debt ceiling tree

With explosive Federal spending and projections of public debt exceeding first $20 and then $30 trillion, I have little doubt that Congress and President Trump will agree on a debt limit increase even if there is a momentary government shutdown.

But right now, credit default swaps are signaling no shutdown, particularly in comparison to previous shutdown fears surrounding debt ceiling increases (orange boxes).


So, there is nothing YET showing up in the CDS data. We are seeing an increase in Treasury bills rates even when the probability of a Fed increase in their rates is very low for the next year.


The probability of a US default is around 0.04%.


But there is also a realization that while there was intial enthusiam that Trump would lower taxes and deregulate the economy,  there is has a steady decline in enthusiasm over his promises since Congress is obstructing most of Trump’s economic agenda.


We can hope that Congress and President Trump follow the advice of the band Canned Heat and work together. 

But we do know that Congress loves to spend money, so they have a natural mutual allegiance to raising the debt ceiling.

Perhaps Andy Dwyer and Mouserat from Parks and Recreation can rewrite their song “The Pit” as “The Wall.”




US Dollar Falls To Lowest Level Since January 2015 On Depressing Jackson Hole Speakers (10Y-2Y Slope Declines To 82.82 BPS)

The monetary retreat at Jackson Hole, Wyoming today was a dovefest. ECB’s Draghi and Bank of Japan’s Kuroda both said that accomodative monetary policy will continue.

And Yellen said very little of substance with no hint of tightening.

The reaction? The US Dollar fell to its lowest level since January 2015.


And the US Treasury 10 year – 2 year curve slope fell to 82.82 basis points.


Yes, optimism at Jackson Hole was in short supply, but hot air was everywhere.

Here are Janet Yellen and Mario Draghi singing “My Kuroda” with the Bank of Japan President. 


ECB’s Balance Sheet Almost The Size of Japan’s Entire GDP (While Japan’s Inflation Rate Is ZERO)

And you think Janet Yellen and The Fed have an inflation problem!

Japan is currently experiencing ZERO inflation.

But the European Central Bank’s balance sheet is nearly as large as Japan’s entire GDP!


Japan’s sovereign yield curve is negative for maturities of less than 8 years. And a yield on their 40 year bond of just above 1%??

Like Puerto Rico and the State of Illinois, Japan is experiencing a decline in their working age population while its share of population over 65 is over 25%.