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quote.bloomberg.com
02/19 00:06
Japanese Bond Investors Choose No Risk, No Returns (Update1)
By Keiko Ujikane
Tokyo, Feb. 19 (Bloomberg) -- Japan's first bids for government bills at zero interest rates suggest investors have given up trying to make money in exchange for the promise they won't lose any.
Investors say those bids, at auctions of three-month and six- month bills in the past three weeks, reflect concern the Nikkei 225 stock average will extend its 24 percent decline in the past year and 10-year bonds will fall further, after handing investors a 1 percent loss so far this year.
``Investors are fleeing stocks and corporate bonds for the relative safety of these government securities,'' said Hiroaki Muto, who helps oversee 8 trillion yen ($59.9 billion) at Nissay Asset Management Corp.
Japan's journey into the Never Never Land of bond investing began last March when the central bank cut overnight lending rates to virtually zero. Average yields at bill auctions dipped below 0.01 percent in May, September and last month. Yet even the locals blinked when investors put in bids that will provide no interest.
They were also surprised by the amount of total bids. An auction Wednesday drew bids worth a record 202.98 times the 3.8 trillion yen of three-month bills on offer. That's equivalent to 1.5 times Japan's gross domestic product for 2000. Ambition pays because auction rules allocate bills in proportion to the amount investors say they want.
`Incredible'
The rules also mean that to get the bills at the average yield, 0.0019 percent at the Feb. 13 three-month auction, some of the bids need to be priced for a lower yield -- even zero percent. Brokers say they can't afford to risk not having bills to sell to their clients.
``It's incredible,'' said Kiyoshi Iida, a senior market economist at Tokyo Tanshi Co. His brokerage participated in the auction because, ``if you are a broker, you have to have inventory even if you are losing money.''
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Banks, which usually buy from brokers like Tokyo Tanshi, say they need to invest in something, even though after accounting for costs, it might be more profitable just to hold cash. Regulators are putting pressure on banks to lend cash out to revive an economy in its third recession in a decade.
Looks Better
``It looks better to have bills'' than have cash sitting with the Bank of Japan, said Noboru Iwamatsu, who helps oversee about 3 trillion yen in fixed-income assets at Dai Ichi Kangyo Bank Ltd.
To understand why cash or bills are so attractive, economists point to the decline in prices. With nationwide prices, excluding fresh food, falling about 1 percent a year, 50 million yen invested today at zero percent interest for six months, is worth 50.25 million yen at today's prices.
While the same amount of money lent to a company or used to buy 10-year government bonds might deliver higher interest, the risk of default is rising with deflation. Moody's Investors Service warned last week that it may cut the Japan's credit rating by two notches because 2 1/2-years of deflation is making it harder for companies and the government to repay debt.
Benchmark 10-year bonds yielded 1.510 percent yesterday, about 151 basis points more than three-month bills, up from a spread of 99.5 on March 21. Yen corporate bonds maturing between one year and 10 years fell in both the third and fourth quarters of last year, according to indexes compiled by Merrill Lynch & Co.
Bank Risk
Deflation is also raising the risk for banks that depositors will panic and rush to withdraw their money, making it important for banks to have cash or bills that can be immediately cashed with the central bank.
On April 1, the government will re-impose a 10 million yen limit on its guarantee of some types of bank deposits. That's prompting concern depositors will withdraw money from any bank that looks too risky.
And many lenders are looking shaky. Under bookkeeping rules that took effect April 1, investors will for the first time have to account for the $98 billion of stocks they hold at market rates in year-end financial reports rather than at their historical value.
They will also have to raise cash to meet balance sheet requirements after writing off more bad loans. Non-performing loans at Japan's 136 nationwide banks increased by 13 percent in the first six months of this business year to 36.8 trillion yen. It may not be easy to sell 10-year and other bonds in a hurry when the financial year ends.
``The coming end of the fiscal year is magnifying attention on the tumble in stocks and how that affects investors who hold bonds,'' said Dai Ichi Kangyo Bank's Iwamatsu.
For many that means loading up on bills, at least until a new fiscal year starts in six weeks.
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