Latest news with #VidyaRanganathan
Yahoo
4 days ago
- Business
- Yahoo
Japan's quick-fix for bond markets sets a global test case
By Vidya Ranganathan and Carolina Mandl SINGAPORE/NEW YORK (Reuters) -Japan, one of the world's most indebted developed economies, this week also turned into a saviour of sorts for its own bond market and globally. When Reuters reported on Tuesday Japan's ministry of finance (MOF) may reduce issuance of super-long tenor debt, bond markets from Japan and South Korea to Britain and the United States reacted positively, pushing prices up and yields down. That paused the weeks-long bond selloff forced by investors demanding bigger yields as they braced for increased inflation and government spending caused by U.S. President Donald Trump's trade and tax policies. Yields on 40-year Japanese government bonds (JGBs) had hit a record high 3.675% last week and were down 40 basis points from that level. Yields on 30-year U.S. Treasuries dropped to below a key 5% figure, helping the yield curve turn less steep. Michael Lorizio, managing director and head of U.S. rates at Manulife Investment Management, said Japan's proposal had stabilised all developed government debt. "As deficits expand, this will be a test case for other countries, if being more flexible around how issuance is scheduled is an attractive option, or not." Japan would be a test case for the entire world on the best way for governments to handle "signs of stress or a mismatch between supply and demand," Lorizio said. As of Wednesday, going by the auction of 40-year JGBs, investors aren't sold on the idea. Demand at the auction was at its weakest since July. A week ago, investors eschewed a 20-year bond auction so badly it was Japan's worst auction result since 2012. "For now, we have more orderly markets and some time for markets to catch their breath but, in the big picture, it's a band-aid," said Tom Nakamura, vice-president and head of fixed income & currencies at Canadian fund AGF Investments. "All these things are meant to help market functioning in the short term, but do very little to alleviate concerns in the medium- to long-term because the underlying causes of those concerns haven't gone away and are not helped by increasing funding from shorter-term instruments," he said. Nakamura said his portfolio has changed to limit exposure to long-end bonds and diversify into markets with healthier fiscal settings or more attractive yields, such as Germany, Poland and Romania. RECOGNISING RISKS Japan isn't alone. Britain's debt agency told Reuters in March there would be an "important shift" away from long-dated debt in the coming financial year in response to rising borrowing costs and reduced investor demand. Britain plans to issue 299 billion pounds ($402.60 billion of government bonds this year - the second highest amount on record - and its bonds have come under pressure from concern about high debt levels and bond issuance. Japan's situation is more complicated than elsewhere as its debt is 2-1/2 times the size of the economy and its central bank has slashed its previous bond buying. That governments are retooling their debt and fund-raising plans shows they are listening to markets, rather than letting central banks manage yields through monetary tools, analysts said. "What surprised us as well as the market was that we didn't really expect the Ministry of Finance to be the one that moves and starts discussing changes in issuance," said Subadra Rajappa, head of U.S. rates strategy at Societe Generale. While the U.S. Treasury has for years gradually shortened the duration of its debt by issuing more short-term bills as longer term bonds mature, overall debt has been rising. If Trump's "big, beautiful bill" on taxes is passed in the coming days, it is estimated to add about $3.8 trillion to the federal government's $36.2 trillion in debt over the next decade. When Moody's Investors' Service downgraded the U.S. rating this month, it projected U.S. public debt, now around 100% of gross domestic product, will rise to 134% over the next decade. "The Treasury is finding that the market doesn't have an appetite for anything at the long end of the curve unless the rate is above 5%," said Eric Beyrich, co-chief investment officer at Sound Income Strategies. "That will force them back to the short end of the curve when it comes to new issues." Germany is the only G7 economy with a debt-to-GDP ratio below 100%, yet investors have also sold its bonds in recent months on expectations of more supply following the surprise creation of a 500 billion euro ($565 billion) infrastructure fund. "The market is sending a signal that concerns are growing around fiscal and debt sustainability," said Chip Hughey, managing director of fixed income at Truist Advisory Services in Richmond, Virginia. "Market participants want to see policymakers use a multi-pronged approach to address deficits and lower their reliance on debt issuance." ($1 = 0.8846 euros) ($1 = 0.7427 pounds)
Yahoo
4 days ago
- Business
- Yahoo
Japan's quick-fix for bond markets sets a global test case
By Vidya Ranganathan and Carolina Mandl SINGAPORE/NEW YORK (Reuters) -Japan, one of the world's most indebted developed economies, this week also turned into a saviour of sorts for its own bond market and globally. When Reuters reported on Tuesday Japan's ministry of finance (MOF) may reduce issuance of super-long tenor debt, bond markets from Japan and South Korea to Britain and the United States reacted positively, pushing prices up and yields down. That paused the weeks-long bond selloff forced by investors demanding bigger yields as they braced for increased inflation and government spending caused by U.S. President Donald Trump's trade and tax policies. Yields on 40-year Japanese government bonds (JGBs) had hit a record high 3.675% last week and were down 40 basis points from that level. Yields on 30-year U.S. Treasuries dropped to below a key 5% figure, helping the yield curve turn less steep. Michael Lorizio, managing director and head of U.S. rates at Manulife Investment Management, said Japan's proposal had stabilised all developed government debt. "As deficits expand, this will be a test case for other countries, if being more flexible around how issuance is scheduled is an attractive option, or not." Japan would be a test case for the entire world on the best way for governments to handle "signs of stress or a mismatch between supply and demand," Lorizio said. As of Wednesday, going by the auction of 40-year JGBs, investors aren't sold on the idea. Demand at the auction was at its weakest since July. A week ago, investors eschewed a 20-year bond auction so badly it was Japan's worst auction result since 2012. "For now, we have more orderly markets and some time for markets to catch their breath but, in the big picture, it's a band-aid," said Tom Nakamura, vice-president and head of fixed income & currencies at Canadian fund AGF Investments. "All these things are meant to help market functioning in the short term, but do very little to alleviate concerns in the medium- to long-term because the underlying causes of those concerns haven't gone away and are not helped by increasing funding from shorter-term instruments," he said. Nakamura said his portfolio has changed to limit exposure to long-end bonds and diversify into markets with healthier fiscal settings or more attractive yields, such as Germany, Poland and Romania. RECOGNISING RISKS Japan isn't alone. Britain's debt agency told Reuters in March there would be an "important shift" away from long-dated debt in the coming financial year in response to rising borrowing costs and reduced investor demand. Britain plans to issue 299 billion pounds ($402.60 billion of government bonds this year - the second highest amount on record - and its bonds have come under pressure from concern about high debt levels and bond issuance. Japan's situation is more complicated than elsewhere as its debt is 2-1/2 times the size of the economy and its central bank has slashed its previous bond buying. That governments are retooling their debt and fund-raising plans shows they are listening to markets, rather than letting central banks manage yields through monetary tools, analysts said. "What surprised us as well as the market was that we didn't really expect the Ministry of Finance to be the one that moves and starts discussing changes in issuance," said Subadra Rajappa, head of U.S. rates strategy at Societe Generale. While the U.S. Treasury has for years gradually shortened the duration of its debt by issuing more short-term bills as longer term bonds mature, overall debt has been rising. If Trump's "big, beautiful bill" on taxes is passed in the coming days, it is estimated to add about $3.8 trillion to the federal government's $36.2 trillion in debt over the next decade. When Moody's Investors' Service downgraded the U.S. rating this month, it projected U.S. public debt, now around 100% of gross domestic product, will rise to 134% over the next decade. "The Treasury is finding that the market doesn't have an appetite for anything at the long end of the curve unless the rate is above 5%," said Eric Beyrich, co-chief investment officer at Sound Income Strategies. "That will force them back to the short end of the curve when it comes to new issues." Germany is the only G7 economy with a debt-to-GDP ratio below 100%, yet investors have also sold its bonds in recent months on expectations of more supply following the surprise creation of a 500 billion euro ($565 billion) infrastructure fund. "The market is sending a signal that concerns are growing around fiscal and debt sustainability," said Chip Hughey, managing director of fixed income at Truist Advisory Services in Richmond, Virginia. "Market participants want to see policymakers use a multi-pronged approach to address deficits and lower their reliance on debt issuance." ($1 = 0.8846 euros) ($1 = 0.7427 pounds)
Hindustan Times
6 days ago
- Business
- Hindustan Times
MORNING BID EUROPE-Europe rallies after the 'good' phone call
A look at the day ahead in European and global markets from Vidya Ranganathan. Donald Trump and the European markets have come full circle again. The euro and European stocks tumbled on Friday when the U.S. president decided abruptly he would impose 50% tariffs on imports from the European Union since trade talks were not moving quickly enough. Von der Leyen said in a post on X on Sunday that she had a "good" phone call with Trump. Markets may have recovered, but not sentiment. The weekend's back-and-forth only served to remind investors how chaotic, impulsive and unpredictable Trump can be, even when dealing with his biggest trading partners. Germany was the EU's biggest exporter to the U.S. last year. In early April, Trump set a 90-day window for trade talks between the EU and the U.S., which was to end on July 9. Trump's latest trade tantrum came just hours after European Central Bank policymaker Joachim Nagel, who heads Germany's Bundesbank, said markets were close to nuclear meltdown after Trump's April 2 reciprocal tariff announcements, and that had helped to discipline the U.S. administration. Apparently not. The slow exit of investors from that chaos - and from their outsized exposures to the world's biggest economy and stock markets - continues. European equity exchange-traded funds have pulled in 34 billion euros of cash over the year to May 16, four times the 8.2 billion euros put into U.S. equity funds, Morningstar data shows. Market holidays in the United States and Britain should keep trading relatively muted on Monday. It's also relatively quiet on the data front, with the notable releases this week including the Fed's targeted inflation metric, Personal Consumption Expenditures, for April, due on May 30. That could paint a clearer picture of the impact of U.S. tariffs. April was a volatile month in the markets after Trump's tariff onslaught on April 2, but recent consumer and producer prices data has not flashed inflationary warning signs just yet. The euro zone's biggest economies - France and Germany - report consumer prices data on Tuesday and Friday, and bloc-wide figures follow the week after. Key developments that could influence markets on Monday: SPEAKERS: ECB President Christine Lagarde, Riksbank executive board meeting COMPANIES: NTS Ackermans & Van Haaren NV Annual Shareholders Meeting, Leonardo SpA Annual Shareholders Meeting DEBT AUCTIONS: Reopening of French 3-month, 6-month and 1-year government debt auctions Trying to keep up with the latest tariff news? Our new daily news digest offers a rundown of the top market-moving headlines impacting global trade. Sign up for Tariff Watch here.
Yahoo
22-05-2025
- Business
- Yahoo
Analysis-Global bond markets signal governments must pay more to borrow long-term
By Vidya Ranganathan and Dhara Ranasinghe SINGAPORE/LONDON (Reuters) -From ho-hum debt auctions to plunging long-term bond prices, investors are sending a clear message to governments that in the current climate of uncertainty they need to pay more to borrow for decades ahead. Yields of government bonds with the longest maturities have risen sharply not just in the United States, where the chaotic first months of Donald Trump's second term in the White House are causing investors to demand better returns on their bond holdings, but also in Japan and Britain. Multi-billion dollar government bond sales, which used to be a seamless process for big economies, are becoming the arena for bond vigilantes questioning government profligacy and inflation outlooks. In Japan and the United States, bond markets do not seem to like the tax cuts the ruling parties are seeking. This week's poor 20-year U.S. bond sale and Japan's worst auction result since 2012 served as a wake-up-call for the market, coming right after Moody's became the last of three major rating agencies to strip the United States of its top triple-A credit rating because of its growing debt. "Investors are thinking that if we are in a world where debt continues to deteriorate, and the growth dynamic is more fragile, the risk premia we demand to hold these bonds should rise, and that's what's happening now," said Zurich Insurance Group chief markets strategist Guy Miller. In the coming weeks, Japan, Germany, the U.S. and the UK will be offering 10-year and 30-year bonds. "Investors are challenging issuance here," said Miller. In theory, governments could spend less or tax more to reassure investors, but belt-tightening is hardly an option given concerns about the impact of Trump's trade war on the global economy. TERM PREMIUM Most of the selling of Treasuries, UK gilts and Japanese government bonds (JGBs) has been at the long end of the curve, driven by concerns that Trump's trade war and tax cuts will stoke inflation and force governments to spend more. UK 30-year gilt yields have hit their highest since the late 1990s this year. U.S. 30-year yields are at 5.09%, up 70 basis points since March. U.S. public debt is around 100% of gross domestic product and projected to rise to 134% over the next decade, according to Moody's. The root reason for the selling is what investors call the "term premium", or the extra yield bondholders expect for locking in their money for a long time. The term premium on 10-year U.S. Treasuries, the extra returns investors demand for holding longer-term bonds rather than rolling over short-term debt, is estimated at 0.79%. That seems too low in this environment - below levels in 2011, when U.S. debt was at similar levels, and a fraction of the 5% during the stagflation of the 1970s. "People are repricing term premia. It's the sort of concern that stews in the back of your mind but doesn't become a problem until it is," said Rong Ren Goh, a portfolio manager in the fixed income team at Eastspring Investments. Goh said he had planned to buy longer U.S. Treasuries to add duration to his portfolio should 10-year yields cross 4.5% and 30-year hit 5%, but changed his mind after this week's developments on the U.S. budget bill and Moody's downgrade. "The process of price discovery, given we are in uncharted territory, may take a while so I would not rush into duration plays at current levels," he said. TRIAL AND ERROR Total outstanding U.S. federal government debt was $36.2 trillion at the end of 2024. A little more than $9 trillion is held by foreigners as of March, with Japan accounting for $1.1 trillion of that sum and China $965 billion. Foreign participation, which includes central banks, in the most recent 30-year Treasury auction was the lowest since 2019, at just 58.88% and it has been tailing off since October. Japanese investors have been dumping longer-end Treasuries and JGBs, whose yields spiked to record highs this week. They too have demanded better yields at recent auctions. "The bigger picture is that deficits do matter, and fiscal policy matters, and fiscal space is finite," said Robin Brooks, a senior fellow at the Brookings Institution. "And it's not just the United States that has a fiscal policy problem." In Japan, bond market concerns stem from the fiscal stimulus lawmakers have planned ahead of an upper house election slated for July, which could mean more government borrowing at a time the Bank of Japan is also reducing its purchases of bonds. That has stirred the same questions around term premium. Ten-year yields at 1.55% are up 44 bps since early April, moving further away from the BOJ's 0.5% policy rate. "People expect the BOJ will continue to raise rates and reduce holdings of JGBs", said Masayuki Kichikawa, chief macro strategist at Sumitomo Mitsui DS Asset Management, Tokyo. "Many investors are probably thinking, especially for super-long bonds, what yield level is consistent with a policy rate at, for example, 1.25% and no support from BOJ buying. We are in a process of finding that equilibrium. It's a process of trial and error." Germany could emerge as a winner of that process. While its yields have also spiked this year following massive stimulus that signals more borrowing, it remains the only Group of Seven economy with a debt-to-GDP ratio below 100%. In fact, during a global bond selloff seen in April, investors flocked to German Bunds. "Despite the (German) spending commitments, debt levels will remain relatively low and growth is likely to be boosted over the longer term," said Zurich's Miller. Error in retrieving data Sign in to access your portfolio Error in retrieving data Error in retrieving data Error in retrieving data Error in retrieving data
Yahoo
15-04-2025
- Business
- Yahoo
Analysis-Market distress could see trillions of dollar holdings seek currency protection
By Vidya Ranganathan SINGAPORE (Reuters) -As Donald Trump's grand plan to redefine global trade whipsaws the U.S. dollar, investors who hold tens of trillions' worth assets in the currency may for the first time in decades be seeking ways to protect the value of those holdings. Such has been the unquestionable faith in the dollar for years that just a fraction of the $33 trillion of global money invested in U.S. markets is protected, or hedged in market parlance, for currency volatility. That may have changed this week as the dollar and U.S. Treasuries - both historically first among equals as refuges during crises - became the biggest casualties of a market rout triggered by the U.S. President's reciprocal trade tariffs. Treasury yields have surged this week as both U.S. and overseas investors fled, and the dollar is down sharply against the euro, Japanese yen, Swiss franc and almost every other currency. An index measuring the dollar's value against six other major currencies is below 100 for the first time in nearly two years. 'The U.S. has provided decades of certainty, stability, independence of the central bank, rule of law," said Vis Nayar, chief investment officer at Eastspring Investments. "The drivers of U.S. exceptionalism, things like immigration have pretty much gone away. Tariffs are likely to be viewed as a tax rise. And we've got an administration that feels that a weaker dollar might help them. Not a good cocktail for unhedged investors.' U.S. markets have punched above their economic weight thanks to the confidence in the dollar. While the U.S. economy accounts for around 26% of global GDP, Wall Street gets more than a third of global equity investment. Foreigners owned $33 trillion of dollar-based stocks and bonds at the end of 2024, of which $14.6 trillion was in debt, and the rest in stocks. Investors in higher-yielding equity markets typically do not hedge their portfolios, analysts say, but currency volatility can be painful for bond investors whose returns are in single-digits or low double-digits. Brutal swings may force their hand into putting on currency hedges, wherein they would use derivative contracts to sell dollars for their home currencies, or even just exit U.S. markets. Analysts at financial consultancy Exante Data estimate a one percentage point (ppt) increase in investor hedging ratios could mean as much as $320 billion in U.S. dollar selling. Given how low hedging ratios are, analysts expect a 10 to 15 point increase in such hedging, if the dollar keeps falling, implying trillions of dollars could be sold in exchange for other currencies. PENSIONS AND LIFERS Japanese pension giant GPIF and life insurance firms (lifers) are among the biggest holders of U.S. assets. The country's exposure to dollar markets was about $2 trillion at the end of 2023. The yen's nearly 6% rise this month and 10% gains in three months are toxic for their holdings, for it will mean less yen per dollar investors eventually bring home. The yen is currently around 143.2 per dollar. Japanese lifers have steadily reduced their hedging ratios, and the country's pension funds almost never hedge. Analysts at Nomura estimate lifers have about 60 trillion yen ($419.64 billion) worth of foreign assets, of which only 30% is hedged, but were expecting that ratio to rise this year if the Bank of Japan raises interest rates. "If Japanese investors are more concerned about the U.S. economy, they will increase their repatriation and currency hedging more aggressively than we currently expect, maybe the dollar-yen could decline to 135 or something like that," said Nomura analyst Jin Moteki. Yunosuke Ikeda, head of macro research at Nomura in Japan, points to Japanese retail investors as another yen exchange rate dynamic. He estimates they invest about 1 trillion yen a month. "They have very consistently been buying U.S. equity funds, and they are not hedged at all. I don't think they would move all at once, but if they did, it would have the potential to strengthen the yen by seven big figures," Ikeda said. Exante Data analyst Shekhar Hari Kumar's back-of-the-envelope estimates show that with overseas assets of about $700 billion, a 10 point increase in GPIF's hedging ratio would translate into about $70 billion in yen buying. "The range of potential hedging flows by Japanese investors is between $100 billion and $250 billion if the yen continues to appreciate and the fund complex increases hedge ratios," he said. Large pension funds in Britain, Australia, Switzerland, Canada and other countries and global lifers are also big investors in U.S. debt. As a fall in the dollar and Treasuries gathered pace, financial supervisors in Europe made the rounds to quiz the banks they oversee. Supervisors including the European Central Bank and national regulators asked about holdings of U.S. government bonds, according to a person with direct knowledge of one such call. That gives an insight into regulators' worries about an asset that always went unquestioned and their fears of the contagion from U.S. policy. A spokesperson for the ECB declined to comment. Exante estimates currency hedging ratio for pensions and sovereign wealth funds (SWF) in 2023 varied from effectively zero in Japan and South Korea to around 40% in Australia and the Netherlands and about 65% in Sweden and Switzerland. A 10 percentage point change in hedging ratio implies as much as $58 billion in forward U.S. dollar sales by the Australian pension and SWF sector, they said. Richard Franulovich, head of currency strategy at Westpac, said in a note that Australia's net international equity assets totalled A$656 billion ($407.05 billion) in the fourth quarter of last year, and hedging ratios had been falling. His estimates are that a 1 percentage point rise in system-wide currency hedging of equities will result in a A$8.7 billion of hedging demand. "A lift in superannuation FX hedging ratios could produce a significant flow-based tailwind for AUD," he said. ($1 = 142.9800 yen) ($1 = 1.6116 Australian dollars) Sign in to access your portfolio
