Market Mover - BNP PARIBAS - Investment Services India

JGBs: Wait for Price Dips in Q2
• JGBs tend to fall in the second quarter of
the fiscal year, due to the reduction of
purchases by postal savings and public
pensions. In addition, numerous factors will
combine to loosen JGB supply-demand
conditions in Q2 FY 2010.
• Our fundamental recommendation is that
investors wait for sufficient price dips before
starting to buy JGBs in H1 FY 2010.
• Moreover, investors need to note the
unexpected resilience of the economy, equities
and the dollar. Such resilience could sway
expectations about BoJ easing, depending on
how it unfolds.
• Looking out through March book closings,
we will remain cautious on the medium sector
of the curve where banks have significantly
increased their long positions.
Many factors to loosen JGB supply/demand in Q2
There is a reason for JGBs’ recent weakness. A
devil-plagued period for many market participants is
approaching. JGBs fell sharply in the second quarter
of both FY 2008 and FY 2009. This was not mere
coincidence. As the repayment of funds entrusted to
the FILP runs its course, JGB purchases by postal
savings and public pensions gradually fall at the start
of each fiscal year. Moreover, other investors,
understanding this, wait for price dips before buying,
exerting further downward pressure on JGBs in Q2 of
the new fiscal year.
That US Treasuries and JGBs are quite closely
linked is well known. As Chart 1 shows, however, the
two markets move independently when monetary
policy is altered or when particular factors impacting
supply-demand conditions come to the fore. In recent
years, there has been a rise in the number of
occasions when Treasuries strengthened
independently or JGBs weakened independently.
The tone of the JGB market has again deteriorated
since the start of 2010. Investors should view this as
the market starting to anticipate the customary “Q2
anomaly”.
Numerous factors will combine to loosen JGB
supply-demand conditions in Q2 FY 2010. Aside
from 1) the anomaly previously outlined, 2) we
expect net JGB supply to increase by JPY 2trn-3trn
compared to Q2 FY 2009; 3) the government may
launch additional stimulus measures after the budget
is passed; 4) it will become clear that tax revenues
Chart 1: A Comparison of 10-year Yields in
Japan and the US
2.0 (%) JGB supply-demand
(%) 5.4
1.8 Japan
conditions loosen
5.0
"Sell Japan" 4.6
1.6
4.2
1.4
1.2
1.0
Fed Treasury purchases
BoJ additional easing
0.8
07/10 08/4 08/10 09/4 09/10
Source: BNP Paribas
US (RHS)
have undershot more than currently projected when
government accounts are settled at the end of May;
and 5) we expect the DPJ manifesto for the Upper
House elections to contain elements of reckless
spending.
Wait for price dips before starting to buy JGBs
Finance Minister Kan has repeatedly pledged he will
announce a medium-term fiscal reform outline by
June of this year. However, it will be difficult to devise
a convincing plan since a consumption tax hike is off
the table ahead of July Upper House elections. If the
plan is a mere formality that lacks true substance, it
will inevitably stoke market unease. That said, after
the election it is unlikely to be further postponed.
Our fundamental recommendation is that investors
wait for sufficient price dips before starting to buy
JGBs in H1 FY 2010. We suspect the impact of the
above factors loosening JGB supply-demand
conditions has not been fully discounted. Moreover,
investors need to note the unexpected resilience of
the economy, equities and the dollar. Such resilience
could sway expectations about BoJ easing,
depending on how it unfolds.
The short end will continue to find support, since the
BoJ has intensified its quantitative easing. However,
if uncertainties overseas and in the domestic political
situation retreat and equity prices rise, institutional
investors’ dependency on the benefit of carry will
ease somewhat. Looking out through March book
closings, we will remain cautious on the medium
sector of the curve, where banks have significantly
increased their long positions.
3.8
3.4
3.0
2.6
2.2
1.8
Koji Shimamoto 12 February 2010
Market Mover, Non-Objective Research Section
25
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