Japan, Russia news may crimp US bond safe-haven bid
06:08 p.m Jul 13, 1998 Eastern
By Ellen Freilich
NEW YORK, July 13 (Reuters) - Recent overseas political and fiscal
developments could jeopardise the flight-to-safety bid that has helped
boost prices of U.S. assets, analysts said.
The defeat of Japan's ruling Liberal Democratic Party (LDP) in
parliamentary elections Sunday and the resignation of Prime Minister
Ryutaro Hashimoto raised hopes that Japan's political leadership might
be jolted into taking steps to revive its recession-mired economy.
And a $22.6 billion pact between Russia and its lenders also
strengthened that nation's fiscal outlook.
''Once the yen has improved in value ... and once you have a sense that
Russia is under active control ... then the flight-to-quality demand for
U.S. Treasuries slackens off,'' said Neal Soss, senior adviser and chief
economist at Credit Suisse First Boston.
The dollar ended lower against the mark on the Russia news and seesawed
against the yen amid varied interpretations of the Japan news. U.S.
Treasury prices fell, with the benchmark 30-year bond off more than a
point during New York trade.
Economists said a stronger Japanese economy that could help stabilise
other Asian economies could remove a drag on otherwise brisk U.S.
economic growth, opening the door for a Federal Reserve monetary policy
tightening, a negative for the U.S. bond market.
Meanwhile, more stable emerging markets could attract some of the
capital that has flowed to U.S. dollar-denominated assets in a
flight-to-quality bid, they said.
Developments between Russia and the International Monetary Fund (IMF)
reinforced the notion that the flight-to-quality bid for U.S. assets
might have peaked.
A bailout negotiated with the IMF and other lenders amounting to $22.6
billion in new credits spread over 1998 and 1999 gave a strong vote of
confidence to Russia's plans for dealing with an acute financial crisis,
analysts said.
Economists said prices could be choppy as financial markets emphasise
different aspects of the Japanese and emerging market developments.
On one hand is the fear that the leaders who succeed Hashimoto in Japan
will not be effective, at least at first, they said. On the other hand
is the notion the LDP's setback is the first step in the direction of
getting something aggressive done to stimulate the Japanese economy.
''And both views are right,'' said Bankers Trust managing director and
chief global markets economist John Williams.
But Williams said U.S. bond investors should be careful what they wish
for. If Russia gets on the road to recovery and Japan leads emerging
Asian markets out of the woods, then a major obstacle to Federal Reserve
and Bundesbank tightening will be removed, he said.
More-stable emerging markets also mean a smaller flight-to-quality bid
for U.S. markets, Williams said. ''It's a double whammy on financial
assets in the U.S. and Europe.''
Nonetheless, he said, it is too soon to short U.S. assets ''because it's
too soon to say that Japan is out of the woods.
''The ideal scenario for the European and U.S. markets would be for Asia
and Russia to muddle along,'' he said. ''This semi-crisis is perfect.
''It keeps the central banks sidelined, it (alleviates) inflation
pressures and lets (the U.S. economy) grow.''
(( -- North American Treasury Desk 212-859-1679))
Copyright 1998 Reuters Limited. |
