DismalTrader

10-yr JGB auction unattractive to investors

Wed, 04 Apr 2012 14:27:04 +0900

Japanese government bond prices fell into negative territory on Tuesday after a 10-year auction result raised worry that investor demand may not be strong at current yield levels.

Although the auction did drew fairly strong bids, market talk afterwards was that buying appeared mostly to have come from brokers wanting to cover short positions, raising worry about demand from investors, including banks.

The June 10-year JGB futures fell to as low as 141.57 from around 14.80 before the auction result announcement. The contract last stood at 141.62, down 0.12 point.

via reuters.com

Investors’ absence at the first bond auction in the Japanese financial year starting from April 1 also came as many investors sell call options on JGBs, essentially bets that bonds will have limited upside potential.

Signs that investors see limited upside potential are also evident in the options market, where, since the start of the new financial year, investors have been selling call options.

Many Japanese banks are selling call options with strike yield just below 1 percent, said a trader at a Japanese brokerage.

On the other hand, put selling, normally another popular strategy among Japanese investors, has been limited so far, in a sign that investors have concerns about a potential slide in JGBs.

There is speculation that some investors may be even buying puts after a large amount of buying earlier this week in May JGB futures puts with strike at 140.50, the trader said.

via reuters.com

Yesterday, the first JGB auction in this fiscal year failed in attracting major banks’ appetite, although some dealers placed aggressive bids to support a narrow tail of 0.01 yen due to rising repo rates in the 10-year zone. B/C ratio decreased from 3.26 in March to 2.76, and the anonymous takedowns continued declining to only 217 billion yen. My multiple sources did not see large sellings in the 10-year sector, but major banks’ appetite has not been clear so far in this term.

Below charts are distributions of takedowns by dealers from December 2011 to this auction.

Solid 10-year JGB auction against lowered yield

Tue, 01 Nov 2011 21:15:44 +0900

Ministry of Finance reopened the issue of 2.2 trillion yen of 10-year JGB today. Although JPY yields declined in the morning, the auction was stronger than expected. B/C ratio increased from 3.15 in October to 3.26, and the 0.01-yen tail became narrower than 0.02 in the previous month. Anonymous takedowns of 686 billion yen are the largest since the lase seven months, which imply major banks’ solid appetite for the long sector.

China October manufacturing PMIs: Which is true?

Tue, 01 Nov 2011 21:00:00 +0900

It was a negative surprise that October China manufacturing PMI released by the China Federation of Logistics and Purchasing dropped to 50.4 from September 51.2.

A Chinese manufacturing index dropped to the lowest level since February 2009, bolstering the case for fiscal or monetary loosening to support the expansion of the world’s second-biggest economy. The Purchasing Managers’ Index fell to 50.4 in October from 51.2 in September, the China Federation of Logistics and Purchasing said in a statement today. That was lower than any of 16 economist estimates in a Bloomberg News survey that had a median forecast of 51.8. A reading above 50 indicates expansion.

An index of export orders contracted for the second time in three months as Europe’s failure to resolve its debt crisis dims the outlook for shipments to China’s biggest market. South Korea reported today the weakest export growth since 2009 and Taiwan’s government said yesterday that the island’s economy expanded by the least in two years.

The PMI reading “is a reflection of slowing momentum in the economy” and exports may “slow sharply in coming months,” said Wang Tao, a Hong Kong-based economist at UBS AG. “Policy will ease more visibly in the first quarter of 2012.”

via bloomberg.com

However, we remember that HSBC and Markit preliminary survey on October China manufacturing PMI released on Oct. 24 in advance suggested a pickup of the index, and it was followed by today’s final release of the index, Oct 51.0 vs. Sep 49.9.

According to Markit,

October data signalled a stronger expansion of manufacturing output in China, as overall new business rose for the first time in three months. Renewed growth of new export orders was also signalled, while companies raised their purchasing at the fastest rate since March. Meanwhile, average input costs rose at the weakest pace in four months. In contrast, output charge inflation accelerated.

After accounting for seasonal trends, the HSBC Purchasing Managers’ Index™ (PMI™) – a composite indicator designed to give a single-figure snapshot of operating conditions in the manufacturing economy – posted 51.0 in October, up from 49.9 in September, signalling an improvement in operating conditions for the first time since June. Nonetheless, the index reading was below the long-run trend (52.1), and at a level indicative of a modest rate of growth.

What is the difference between the two indices? Bloomberg said:

A separate manufacturing index released today by HSBC Holdings Plc and Markit Economics rose to 51 from 49.9. The surveys have different sample sizes and methodologies.

According to the definitions of the two indices, those biggest difference is the sample size: CFLP 820 and HSBC over 400. Both indices are weighted average on five of the individual indices with the following weights: New Orders - 0.3, Output - 0.25, Employment - 0.2, Suppliers’ Delivery Times - 0.15, Stock of Items Purchased - 0.1.

The chart below compares the three series: CFLP (official), HSBC (final), and HSBC Flash (preliminary). The last two series are almost the same. The first official numbers show a more moderate decline since the last year end, but more volatile (pick-ups) in the short run than the HSBC series, possibly because those include ~~smaller~~ larger-sized government-affiliated firms. If it is true, the CFLP series might turn to increasing later but gradually.

(UPDATE) As several Chinese economy analysts already pointed out, the HSBC data showed a recovery trend because the share of small- and medium-sized private firms in the sample is higher than the CFLP, and those firms activities could be stimulated by recent easing policies on loans by the Chinese government.

Recent auctions don't shake JGB market at all

Wed, 26 Oct 2011 21:03:35 +0900

Having skipped the JGB auction reviews in September and October, we summarize those results: 10-year JGB auction on September 1 resulted in a 2.96 b/c ratio, the lowest since June, but a 0.01 yen tail, which indicated strong biddings. The 10yr auction on October 4 had a good result in a 3.15 b/c ratio with a 0.02 yen tail. Anonymous takedowns, which are closely watched as those of major banks and a few dealers, were both arond 400 billion yen, and major banks’ appetite for the 10 year sector has been steady but not extraordinary large.

In terms of 5-year JGB auctions, the September auction had a result with a 2.68 b/c ratio and a 0.01 yen tail. That was slightly weak, because many banks sold massive JGBs, particularly in the medium term sector, for profit-taking for the end of the fiscal term. The October auction had the similar result with the previous month, with the b/c ratio of 2.72 and the zero tail. That result suggested that many banks would continue investing in the medium term sector, rather than shift to selling the medium-term sector and buying the longer sector to extend duration.

These results above did not fundamentally infulence the JGB market direction, while overseas yields largely moved in these months. The charts below compare 5-day changes in 5-year and 10-year JGB prices before and after the auction date. The recent stability is outstanding.

Japan Aug jobless rate decline for a technical reason

Fri, 30 Sep 2011 23:58:00 +0900

Labour market conditions improved remarkably in August, as the unemployment rate fell to 4.3% from 4.7% in July. The improvement in the official unemployment rate is largely due to the shrinking of the labour force (-420k). In addition, employment declined (-160k). Jobs were created in construction, which was of course related to earthquake-related reconstruction. Employment is likely to remain broadly unchanged in the coming years. As the labour force is shrinking, unemployment is forecast to edge down to close to 4% in 2012.

via fxstreet.com

Positive surprise in Japan August unemployment rate decline is due to a significant decline in labor force which is larger than that in employment. But, why did the labor force largely decrease in August? Did more workers get discouraged in job search?

Economic Monitor by Itochu explains that reason as 15-year-or-more population declined by 210k in August, and that seemed to happen because a large number of foreigners left Japan after Tohoku earthquake in March. Labor force survey excludes those who leave the country from population numbers after they stay in foreign countries for 91 days. A large number of foreigners left Japan in March, and that is reflected in August labor force survey with three months and more time-lag.

Thus, the result of August unemployment rate does not have significant means, and careful observation in various population-related data will be needed.

China manufacturing deterioration

Fri, 23 Sep 2011 15:55:00 +0900

September Flash China Manufacturing PMI at 49.4 vs 49.9 in August.

Markit said:

Commenting on the Flash China Manufacturing PMI survey, Hongbin Qu, Chief Economist, China & CoHead of Asian Economic Research at HSBC said: “This is a similar moderating growth picture as in the previous two months. Fears of a hard landing are unwarranted. External demand weakened a little but official trade data still show solid export growth. China is less dependent on net exports, whose contribution to GDP growth was almost zero in 1H. Resilient domestic demand is sufficient to support around 8.5-9% growth in the coming quarters.”

via markit.com

The Lex column describes a more optimistic view:

However, there are crucial differences this time. In 2008, exports accounted for up to 8 per cent of China’s gross domestic product. Now, they make up to 3 per cent, according to HSBC, and exports only contributed very slightly to first-half growth. Inflation appears to have peaked, suggesting monetary policy will not tighten much further. Domestic demand is strong and growth is expected to hold steady at about 9 per cent.

via ft.com

A lot of market forecasts on Chinese economy have been revised down since early August, and many analysts put the reasons on deteriorating economy in US and Euro. But, Chinese domestic demand has already peaked out, possibly because the US demand slowdown already had a negative influence on Chinese production before the recent ugly US employment figures were revealed. I have some impression that those who had bullish outlook on China are partly blaming the advanced economy slowdown for the recent China deterioration. Rather, particularly in terms of Chinese manufacturing industries, differentiating domestic and overseas demand cycles does not make sense, because they are tightly combined with intermediate goods production and trades.

Japan July industrial production and global inventory cycle update

Wed, 31 Aug 2011 20:31:35 +0900

The rebound in Japan’s industrial production after the March 11 earthquake may be coming to an end, making the nation’s economic recovery even more dependent on overseas demand.

Factory output increased a less-than-expected 0.6 percent in July from June, the slowest gain since March, the Trade Ministry said in Tokyo today. Production has recovered to 95 percent of its level before the March temblor and tsunami, the ministry said.

“The report points to growing concern over the outlook for the economy as the overseas economy is slowing and the yen is staying at a historically high level,” said Shuichi Obata, senior economist at Nomura Securities Co. in Tokyo. “There’s a high chance that the pace of Japan’s recovery will slow in the fourth quarter.”

The median estimate of 28 economists surveyed by Bloomberg News was for a 1.4 percent gain in production after a 3.8 percent increase in June.

via bloomberg.com

The chart below updates Japan and global shipment/inventory balance cycles, which was once posted in December 2010. In terms of a lagged relationship between Japan and China, you will clearly see that the Japan cycle lagged the Chinese one by 1-3 months: The bottom at Nov 2008-Jan 2009 and the peak at Nov 2009-Feb 2010.

However, both Japan and China seem to simultaneously hit the latest bottom in April 2011. It is because Japan experienced a V-shaped recovery immediately after the March earthquake, and that made up for a gradual decline in overseas demand. The Chinese balance continues to be negative, which means inventory adjustment has not finished yet, and the Japanese negative balance possibly could become wider again. The chart also indicates that the German cycle is apparently turning into an inventory adjustment phase.

Japanese banks rate exposures

Thu, 18 Aug 2011 20:00:00 +0900

I was given a chance to review financial releases on Japanese major banks. The charts show a comparison of the major banks about shares of notional exposure of JGBs and IRS on capital. The first one is about ‘fundamental exposure’, sum of held-to-maturity JGB outstandings and net long-positioned notional amounts of non-hedged IRS, suggesting potential (but duration unconsidered) exposure at fiscal year ends. Towards a fiscal term end, Japanese major banks usually operate various rate trades to adjust their portfolio in order to meet profit or risk targets. To the extent of that, the fundamental exposure reflects banks’ principal attitudes towards rate risks, excluding short-term operations.

The ratios of MHCB(Mizuho Corporate Bank) are the highest among four major banks, and that of Shinsei is even higher than MHCB. Considering that MHCB’s duration gap between its assets and liabilities is smaller than the other three major banks, MHCB is supposed to tend to extend gaps with larger IRS exposure than the others. It is supposed that Shinsei and Aozora are the same.

The second chart indicates ‘overall exposure’, which adds available-for-sale JGB outstandings to the potential exposure. Banks trade available-for-sale JGBs for various purposes, such as liquidity, collateral, carry profits, capital gains, etc. Although BTMU(Bank of Mitsubishi Tokyo UFJ)’s fundamental exposure has been very small recently, its overall exposure is as large as the other banks. It implies that BTMU is likely to have rate exposure with JGB long positions.

5-year JGB auction: Not bad but wasted

Thu, 11 Aug 2011 21:33:36 +0900

Japan Ministry of Finance held an auction for a new 5-year JGB issue with 0.4 percent coupon. As overseas yields are aggressively plummeting, a lot of JGB investors are relatively calm to buy and sell the bonds for profit-taking, especially in the short- and medium-term sectors. Therefore, JGB dealers seemed to have slightly long positions in the medium-term zone. In addition, today’s issue was a new one, not reopened, and the dealers were reluctant to place competitive bids. The bid-to-cover ratio was down from 3.68 in July to 3.37, and the tail widened from 0.01 yen to 0.03 yen. Anonymous takedowns largely declined from 843.5 billion yen in July to 303.2B, which was smaller than the average of YTD, 500B.

The last two charts show a comparison of JGB and UST yield curves between August 2010 and 2011. While the UST curve today is more bull-flattening than immediately after the last year’s Jackson Hole meeting, the JGB curve is more bear-steepening.

JPY Intervention

Thu, 04 Aug 2011 20:13:00 +0900

The yen dropped by the most since October 2008 against the dollar after Japan sold its currency to stem gains that threaten the nation’s economic recovery. The yen fell more than 4 percent against the dollar, the biggest drop since a 6.1 percent decline on Oct. 28, 2008, and surpassing the 3.93 percent drop at the previous intervention on March 18 this year. The Bank of Japan followed its Swiss counterpart in easing monetary policy, with Finance Minister Yoshihiko Noda saying Japan’s action was unilateral following joint yen sales by Group of Seven nations in March. The franc fell for a second day. The euro declined against the dollar before the European Central Bank’s interest-rate decision today.

via bloomberg.com

These are intra-day USD/JPY comparison charts on the recent three JPY interventions. Today’s intervention looks more sticky than the past two, aiming at 80.0.

UPDATE After ECB meeting and large sell-offs in US stock markets, USD/JPY is coming back to 78.

10-year JGB auction sees a solid result

Tue, 02 Aug 2011 18:32:18 +0900

Japan Ministry of Finance held an auction for 10-year JGB issue with a 1.1 percent coupon. JGB investors activities have been mixed since the Greece and US debt problems arose in June-July. As global economic fundamentals became worse, the invesors bought and sold back in the near terms on the curve. In terms of the longer sector, as the first chart on JGB monthly net purchases by investor type, major banks recorded net short positions in May and June. Still, not a few investors are reluctant to make long positions, but some banks recently turned more active in that sector from later July.

The auction result was sold. The bid-to-cover ratio was 3.07, slightly lower than July but above 3.0. The tail, 0.02 yen, stays at a very narrow level. Anonymous takedowns were 524.8 billion yen, which is more than the recent 6-month average.

Net revenue changes head-to-head: JPM vs GS

Wed, 20 Jul 2011 20:36:21 +0900

So contrasting …

10-year JGB auction: Little tighter than expected but moderate

Tue, 05 Jul 2011 23:13:00 +0900

Japan Ministry of Finance reopened 10-year JGB issue with a 1.2 percent coupon for 2.2 trillion yen. Before the auction, a 10-year yield level climbed up from 1.10 to 1.15 following the recent Treasury yield rise. A yield under 1.2 percent did not seem attractive to bank portfolio investors yet, and thus large investors placed a minimum lot of direct bids. But, dealers appetite made up for the large buyers demand, possibly because they bought for regional banks that largely sold off for profit takes during the second quarter.

The bid-to-cover ratio was 3.24, almost average but larger than June. 0.02-yen tail became a little tighter than June. Anonymous takedowns were 397.7 billion yen, down for three consecutive months.

Euro Systemic Risk Index

Mon, 20 Jun 2011 19:59:00 +0900

As Greek debt problem has largely drawn attention from global financial market again, I compiled several market data related to European credit, by reference to ten Euro systemic risk indices proposed by Credit Suisse: (1) Libor-OIS spread, (2) EUR basis swap, (3) EUR/USD 3-month ATM implied volatility, (4) 10y swaps 3-month ATM implied volatility, (5) EUR/USD 3-month Risk Reversal, (6) EUR/USD spot rate, (7) iTraxx Financial Sector, (8) iTraxx Europe, (9) iTraxx Europe 3-month ATM implied volatility, (10) iTraxx Europe Senor Tranche Correlation (12%-22%).

The chart below shows a time-series index, which is a simple average in standardized values of (1)-(8). Because the index is the simple average, its level cannot be precisely interpreted as an explicit indicator to represent specific facts. But, its momentum well traces implicit fears from market participants to overall Euro financial situation.

The index surged in these one or two weeks, but the current level was not so high as last year the Greece and peripheral fiscal problems arose or the Lehman collapse year. ECB’s continuous support for liquidity and EFSF/ESM establishment have succeeded in preventing a critical crash so far, although the Greece debt problem became harder to solve. However, Eurozone needs to restore confidence in its monitoring and executing fiscal reforms in the member countries in order to eliminate the wide-spread fiscal concerns.

Japan Core Machinery Orders Fall 3.3% In April

Mon, 13 Jun 2011 22:43:30 +0900

Core machinery orders in Japan were down 3.3 percent on month in April, reflecting the ongoing damage from the devastating earthquake and tsunami on March 11.

The headline figure was sharply lower than analyst expectations for a 2.3 percent increase following the surprising 2.9 gain in March.»On an annual basis, core machinery orders eased 0.2 percent - again well shy of expectations for a 4.9 percent increase after unexpectedly surging 6.8 in the previous month.

via rttnews.com

Even if you look at the “core” data of Japan machinery orders, which excludes orders from ship-building and elecricity companies, those are too volatile to describe detailed trends in capital expenditure. Thus, you can get a rough picture using machinery-based trimmed mean series.

On a 5-percent trimmed mean basis, the chart below shows that the recent YoY growth rates in the machinery orders were positive but gradually slowed down. As a whole, it does not seem to be significantly affected by the March earthquake, possibly because it can be hard for firms to cancel large machinery orders for large fixed investment projects immediately after the quake, except in the quake-stricken area. As changes in fixed investment plans largely depend on expected demand, firms could gradually modify their investment schedules. Yomiuri Shinbun reports that, according to an official of Cabinet Office, there are only a few cases that orders were cancelled directly by the earthquake.

5-year JGB auction: Steady but not strong

Thu, 09 Jun 2011 21:46:00 +0900

Japan Ministry of Finance held an auction for a new 5-year JGB issue with 0.4 percent coupon. Before the auction, it was widely recognized that major banks would show large appetite for that new issue, and the auction result could be strong. But, during the morning session, JGB yields in the medium sector fell, which dampened investors’ appetite.

The bid-to-cover ratio was down from 3.25 in May to 3.21, although the tail shrank from 0.02 yen to 0.01 yen. Anonymous takedowns were 450.6 billion yen, which was almost the same size as the average from this January to May.

Japan major banks seem to be still careful for accumulating the medium-term JGBs, and, instead, short-term TDB yields have been kept very low.

10-year JGB auction: Still moderate

Wed, 01 Jun 2011 21:45:00 +0900

Japan Ministry of Finance held an auction for 2.2 trillion yen of 10-year JGB issue with a 1.2 percent coupon. Before the auction, some sell-offs triggered by a strong outlook for Japan industrial production in May-June were seen especially in longer sectors in the curve, and it was guessed that some banks moved to profit-taking. That might support the auction, but many did not expect that they fully cover that delta by the auction.

As expected, the result was moderate: The bid-to-cover ratio was 2.70, almost the same as May 2.73 and below the average of around 3.0. The tail was a little wider than the previous auction, and anonymous takedowns were 425.6 billion yen which is even smaller than 596.3B in May. Major banks were assumed to bid minimum lots they need. It was similar with the previous auction in May, and it was supposed that JGB futures were sold for hedging by dealers immediately after the auction.

NYT: Japan Appears Dispensable as a Supplier

Mon, 30 May 2011 21:08:44 +0900

Japanese supply chain is another Galapagos? From NY Times:

Maybe Japan is not as crucial to the global supply chain as those first weeks after the earthquake made it seem.

The big European company’s experience is widely shared. More than two months after the disaster, any lingering impact on industries outside Japan from shortages of crucial supplies is limited. Beyond their concerns about a very short list of components, like certain automotive microcontrollers, companies around the world are cautiously breathing easier.

“The global supply chain has been able to weather the storm,” said Hau Lee, a professor at Stanford University’s graduate school of business. Barring further unexpected shocks, Mr. Lee said, “This has not been as bad as most people initially worried it might be.”

The resiliency of global supply networks and quick action by companies are part of the reason. But another explanation was provided by a study published last week, led by Mr. Lee and Kevin O’Marah, a supply chain specialist at Gartner, an information technology research and advisory company.

Their report used data from a survey of 750 supply chain managers across a spectrum of industries worldwide, sponsored by SCM World, a professional organization and Web site. As it happens, the survey was done in February, shortly before the quake and tsunami. It found that Japan, despite being the world’s third-largest economy (behind the United States and China), plays a relatively small role in the global supply chain.

The supply managers gave a telltale sign when asked to name the most important source of supply of manufactured parts and materials outside of the corporation’s home country. They were then asked to name their second and third most important nonhome source.

China was the leader, with 37 percent of the managers saying it was their leading source beyond the home nation. Next came the United States with 20 percent, followed by Germany with 7 percent. The same order was evident in the combined totals.

Japan fell well down the list, tied for eighth with Canada.

via nytimes.com

April JGB net purchases by investor type

Fri, 20 May 2011 23:34:00 +0900

JSDA release of April JGB net purchases by investor type shows that major city banks largely sold medium-term sector JGBs in order to take profits while the yields had a downward trend. It is supposed that they could not shift funds from the medium-sector to the longer sector as soon as they sold the medium-sector, and start extending their duration in early May as overseas rates dropped triggered by sharp declines in commodity prices.

5-year JGB auction reslult goes lackluster

Thu, 19 May 2011 22:19:00 +0900

Ministry of Finance reopened the issue of 5-year JGB with a 0.5 percent coupon. In May, as the first chart shows, JGB yield curve went bull-flattening earlier, and then turned bear-steepening. But, changes in the medium-term sector were limited, compared with longer sectors in the curve. Sell-offs in the medium sector are expected to continue since late April, and demand for the auction would not be so large.

The bid-to-cover ratio was 3.25, less than 3.56 in April and the least since December 2010, although the tail of 0.02 yen was unchanged from the previous month. Anonymous takedowns were 527.8 billion yen, which is the largest from this January to April, but investors’ demand for that sector was not promoted after the auction.