“We don’t believe the effect of the stimulus will fade,” Yosano said.

TO BE NOTED: From Bloomberg:

"Yosano Says Japan’s Trust in Treasuries ‘Unshakable’ (Update1)

By Keiko Ujikane and Takashi Hirokawa

June 12 (Bloomberg) -- Japanese Finance Minister Kaoru Yosano said his government is confident about the outlook for U.S. Treasuries, signaling the second-biggest foreign holder of the securities will keep buying them amid record sales.

“We have complete trust in the fact that the U.S. views its strong-dollar policy as fundamental,” Yosano, 70, said in an interview in Tokyo on June 10 before attending a Group of Eight meeting of finance ministers starting today in Italy. “So our trust in U.S. Treasuries is absolutely unshakable.”

The U.S. government has come under fire from some creditors as spending to prop up its economy is projected to quadruple its budget deficit to $1.85 trillion in the year ending Sept. 30. China and Russia, the largest and third-largest single holders of the debt, have said they may reduce their reliance on dollar- denominated assets, fueling a surge in Treasury yields to a seven-month high.

“Japan is, of course, mindful that selling Treasuries will cause the yen to strengthen and that would hurt corporate profits,” said Chotaro Morita, chief strategist in Tokyo at Barclays Capital Japan Ltd. in Tokyo. “Even with their strong ties, it’s possible Japan would consider selling U.S. Treasuries should the dollar say, halve in value.”

Yields Jump

Ten-year Treasury yields fell two basis points to 3.83 percent after Yosano’s remarks and have jumped from a record low of 2.04 percent in December. They advanced to their highest since Oct. 16 this week after Alexei Ulyukayev, first deputy chairman of Russia’s central bank, said on June 10 his country may switch some of its Treasury holdings to International Monetary Fund bonds.

China Premier Wen Jiabao called in March for the U.S. “to guarantee the safety of China’s assets” and central bank Governor Zhou Xiaochuan has proposed a new global currency to reduce reliance on the dollar.

“We have complete faith in U.S. economic and fiscal policy,” said Yosano, who is also the minister in charge of Japan’s banking sector and economic policy. “The U.S. dollar’s position as the world’s reserve currency isn’t under threat.”

U.S. President Barack Obama has tried to assuage investor concern by pledging to cut the shortfall in half by the end of his first term. Obama may borrow a record $3.25 trillion this fiscal year, almost four times last year’s amount, according to Goldman Sachs Group Inc.

Strong U.S. Currency

A strong U.S. currency benefits Japan by increasing corporate profits in yen terms and preserving the competitiveness of exports. A collapse in global demand and the yen’s 8.5 percent advance against the dollar since September caused earnings to tumble a record 69 percent last quarter.

Japanese investors are the biggest foreign holders of Treasuries after China with $686.7 billion of the securities in March, according to the Treasury Department. To reduce Japan’s investment risk, some lawmakers have argued the U.S. should sell yen-denominated debt, an idea Yosano said the government wouldn’t pursue.

“We have no intention of asking for that,” Yosano said. “It’s up to the U.S. to decide whether to issue dollar- denominated bonds or samurai yen-denominated bonds.”

Masaharu Nakagawa, finance spokesman of the opposition Democratic Party of Japan, said last month the government should ask the U.S. to sell debt denominated in yen, so-called samurai bonds, over his concern that the dollar may weaken.

Poets in Family

Yosano, a cancer survivor who became a lawmaker in 1976, is the grandson of Tekkan and Akiko Yosano, poets whose work is taught to school children. The son of a diplomat, Yosano is fluent in English and studied in Cairo for three years when he was a teenager. He graduated with a law degree from Tokyo University in 1963.

Under Yosano’s stewardship, Japan in April unveiled a record 15.4 trillion yen ($158 billion) stimulus package to pull the nation out of its deepest postwar recession. The minister said new measures may not be needed because packages announced since last year have already started to support the economy.

“We don’t believe the effect of the stimulus will fade,” Yosano said.

In the long term, Japan will need to reduce its reliance on exports and foster spending at home to sustain growth, he said.

“Ceaseless efforts are needed to create new technology and products,” Yosano said. “We need to increase domestic demand to invigorate the economy and make a significant contribution to global growth.”

To contact the reporter on this story: Keiko Ujikane in Tokyo at kujikane@bloomberg.net; Takashi Hirokawa in Tokyo at thirokawa@bloomberg.net

And presently, I don’t believe the reason that rates are backing up has to do with a lack of confidence in the Federal Reserve

From Alphaville:

"Treasuries out of line with interest rate expectations Posted by Izabella Kaminska on Jun 09 19:27.

The curious case of rising Treasury bond yields continues to attract various theories and explanations in the market. The latest doing the rounds is that it may have nothing to do with rising interest rate expectations at all. Rather, it is more about the yield curve becoming the function of an exceptional rate of supply, as well as some unusual market dynamics stemming simply from, well, unusual times.

Barclays Capital points out the Fed would otherwise have to raise rates to as much as 5.5 per cent by the end of next year to meet current market expectations based on the two-year yield. They suggest this is somewhat unrealistic given ongoing rising unemployment and negative pressures on the economy.

Among those backing the over-supply theory on Tuesday was also Dallas Federal Reserve president Richard Fisher. He told Fox Business news (our emphasis):
Long-term, as Milton Friedman said, sustainable inflation is a monetary phenomenon so we are going to have to be careful as an institution — the Federal Reserve — to make sure that we pull things back in, at the right time…And presently, I don’t believe the reason that rates are backing up has to do with a lack of confidence in the Federal Reserve. I think it has to do largely with a very simple phenomenon, supply and demand. There’s an enormous need for the Treasury to borrow. You mentioned the numbers earlier. Today about $35 billion will be financed through operations, $65 billion this week as you mentioned. Probably a trillion over this remainder of this fiscal year and under these circumstances, rates are indeed backing up as you mentioned in the Treasury sector, particularly at the longer end of the yield curve. I don’t think it’s unusual. I don’t think it’s wrong. I don’t think it’s odd. It’s just happening.”

In agreement too were primary treasury dealers. According to a Bloomberg survey, 15 of the 16 US government security dealers said policy makers would likely keep the target for overnight loans between banks in a range of zero to 0.25 percent this year. Bloomberg quoted one of the dealers as saying:

“The market seems wrong on this one,” said Eric Liverance, head of derivatives strategy in Stamford, Connecticut, at UBS AG, one of the dealers. UBS predicts that the Fed will remain on hold until June 2010. “High unemployment and a continued bad housing market will prevent the Fed from raising rates.”

Nevertheless, some still remain sceptical that massive supply alone can by enough of an explanation to justify the bond-yield conundrum. David Rosenberg of Gluskin Sheff writing on Tuesday was among those seeing some genuine inflationary forces at play. As he wrote:

The question is what is driving yields higher and what will cause the run-up to stop? Well, much is being made of supply and massive Treasury issuance, and to be sure, this has accounted for some of the yield backup but not nearly all of it — after all, Aussie bond yields has soared more than 100bps despite the country’s fiscal prudence. Clearly, the ‘green shoots’ from the data has been a factor forcing real rates higher. The doubling in oil prices and the rise in other commodity prices has generated some increase in inflation expectations, and the 40%+ move in equity prices and sustained spread narrowing in the corporate bond market has triggered a flight out of safe-havens (like Treasuries), and part of the move has been technical in nature owing to convexity-selling in the mortgage market with refinancings plummeting since early April. But, he added, those forces could easily be reversed by the end of the year:

Where we think the greatest potential will be is in inflation expectations — they should reverse course in coming months. Three different articles in today’s Wall Street Journal (WSJ) lead us to that conclusion: • More Firms Cut Pay to Save Jobs (page A4) • To Sustain iPhone, Apple Halves Prices (B1) • In Recession Specials, Small Firms Revise Pricing (B5)

The sudden flattening of the curve experienced in the last two sessions, meanwhile, did see something of a reversal on Tuesday. But, according to Barcap, that doesn’t necessarily mean the market should be counting on more steepening in the near-term.

As they explain, the continued unwinding of “steepener” trades on profit-taking, could very easily push front-end yields higher once again:

But while yields on traditional bond securities stay elevated, overnight rates in the Treasury repo market appear to be heading lower. Dow Jones reported on Monday that two-year treasury issues are now also so sought after that like just like 10-year securities they have begun trading at negative rates. As the wire report stated:

1601 GMT [Dow Jones] There’s still a severe shortage of 10-year Treasurys in overnight repo. And now the two-year’s also quoted negative, at -0.05%, though not as deeply as the -2.65% rate on the benchmark, according to GovPx. A negative rate means borrowers are paying an additional premium to get their hands on the security. All other issues trading close to 0.30% general collateral.

Related links:
Treasury sell-off goes short - FT Alphaville
“The adjustment in the US Treasuries market is THE story in financial markets” - FT Alphaville
US Treasuries selling off, benchmark yield curve hits record wide - FT Alphaville

This entry was posted by Izabella Kaminska on Tuesday, June 9th, 2009 at 19:27 and is filed under Capital markets. Tagged with Deflation, inflation, repo market, Treasuries."

Me:

Don the libertarian Democrat Jun 9 20:57

What you're saying then, is that, for example, when people buy 2 year bonds from the govt, some people are buying because:
1) They think that the interest rate of the bond reflects the interest rate expected for the next two years:
"interest rate expectations"
2) There aren't enough 2 year buyers for the govts needs, so it has to raise the price by paying a higher interest rate:
"an exceptional rate of supply"
So, one group is holding out for higher interest because they know that the govt needs to pay them more right now, while the other group is holding out because they don't want to buy a bond at a yield below inflation going forward.
But shouldn't there be more demand if investors were certain that inflation was going to be below these yields? And shouldn't inflation hawks want a rate safely above the expected rate of inflation? Couldn't this then just be an equilibrium between the two? Or what am I missing? Everything?

coming from Japan’s opposition party — which isn’t exactly steaming ahead towards victory

TO BE NOTED: From Alphaville:

"Samurai-ed: Japan ‘would avoid dollar bonds’ Posted by Tracy Alloway on May 13 10:12.

Japan voiced some anti-dollar/US Treasuries remarks and a future preference for samurai bonds late Tuesday.

From the BBC:
Japan’s opposition party says it would refuse to buy American government bonds denominated in US dollars, if elected.

The chief finance spokesman of the Democratic Party of Japan, Masaharu Nakagawa, told the BBC he was worried about the future value of the dollar. Japan has been a major buyer of US government bonds, helping the US finance its Federal budget deficits.

But, he added, it would continue to buy bonds only if they were denominated in yen - the so-called samurai bonds.

Yen-denominated bonds would effectively mean that the US is exposed to the risk of future falls in the value of the USD rather than Japan. That’s a pretty big policy shift for Nippon, which has been a strong buyer of US Treasuries - and, taken with comments coming out of China, hints at a growing unease in Asia over the USD’s supremacy.

But, as the BBC story notes, this is coming from Japan’s opposition party — which isn’t exactly steaming ahead towards victory. Nakagawa’s comments have also been toned down since his interview with the BBC, and there is, as often happens with Japanese politics, undoubtedly a dose of anti-gaijin political rhetoric in the above. BarCap has a good summary:
Masaharu Nakagawa, the “shadow” finance minister of Japan’s largest opposition party, the Democratic Party of Japan, was quoted by BBC on 12 May saying that his party would shun buying US bonds denominated in dollars if his party took the reins of government as a result of Japan’s upcoming lower house election. In an interview with Bloomberg News on 13 May, however, Mr. Nakagawa clarified that it would merely be one option for Japan to propose that the US government issue samurai bonds (US bonds denominated in yen), and that this was strictly his personal proposal and would not necessarily be implemented immediately by the party if it took the helm. The comments, while perhaps reflecting a genuine concern shared by other world leaders, would also serve to boost Mr. Nakagawa’s nationalist credentials ahead of the election and, we believe, should be viewed primarily in that context. Japan’s lower house election must be held by this September, but could be called earlier if the prime minister decides to dissolve the lower house prior to that time.

The samurai will be waiting for a while, it seems.

Related links:
Samurai bond market revives - FT
China to US: We hate you - FT Alphaville
We ‘hate you guys’ even more now… - FT Alphaville

This entry was posted by Tracy Alloway on Wednesday, May 13th, 2009 at 10:12 and is filed under Capital markets, People. Tagged with china, Dollar, japan, Treasuries, yen."

10 year note is approximately at the level which prevailed on the day when the Federal Reserve announced quantitative ease

TO BE NOTED: From EconomPic Data:

"Ten Year Yields: Higher or Lower?

Higher --> Supply: Across the Curve

Treasury bonds are taking a severe drubbing and the yield on the benchmark 10 year note is approximately at the level which prevailed on the day when the Federal Reserve announced quantitative ease (2.96 percent currently).

One participant noted that the 200 day moving average on the Long Bond was 3.798 percent and the market penetrated that level this morning as a sharp knife would melting butter.

Lower --> Quantitative Easing / Continued Economic Deterioration: Zero Hedge

There has been a lot of criticism of Big Ben (us included) but one thing that has come out is he is not afraid to take relatively risky moves to combat whatever he perceives as the biggest threat. As we have noted before, he has clearly revealed his playbook in the past and we see little indication that he will stray from it going forward. On the balance between inflation and deflation, much has been made of the Chinese response if we try to print our way out of this situation but the much larger problem has always been deflation. Combining what we know about the available policy options and the effectiveness of the last round of QE, we have to believe that more purchases of long rates are on the table as a serious consideration.

Source: Yahoo

Posted by Jake at 3:49 AM