- Markets & Risk Newsletter
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- Japanese Government Bond Futures National governments of industrialized nations, like big ocean-going supertankers, take a long time to change direction. The forces that act upon them must be powerful and the effects of change may take a long time to appear. It is not surprising that government bonds are seen by investors as slow-moving targets, less susceptible to sudden change than their volatile cousins in the corporate market. Yet investors are endlessly inventive, and eagerly measure and evaluate the most subtle seismic tremors in government bond markets. Investments are made or abandoned based on the movement of a few basis points up or down.
On October 19, 1985, The Tokyo Stock Exchange entered a new era when it initiated trading in 10-year Japanese Government Bond (JGB) futures contracts. The JGB Futures market expanded rapidly and is now regarded as one of the largest futures markets in the world. Today, Japanese Government Bonds are worth a total of 684 trillion yen (US$7.6 trillion). The benchmark product is the 10-year bond, which holds a face value of 10,000 yen.
Price Pressure Points It is a widely held axiom that bond prices tend to inversely mirror stock prices. When investors flee stocks they often embrace bonds, and vice-versa. Thus the JGB futures market reflects the Japanese and international stock markets.
The JGB futures market has seen recent volatility. On June 12, 2009 JGB 10-year bond futures hit a low of 135.95 following a sell-off in U.S. Treasuries the previous week when smaller-than-forecast U.S. job losses ignited fears the Federal Reserve might raise interest rates sooner than expected. JGB futures rebounded, hitting a six-month high on Friday, October 9, as Tokyo shares fell on concerns about the U.S. economic recovery, prompting investors to pick up safe-haven government debt. Government Bonds Looking Forward What is the outlook for government bond futures in the months ahead? Volatility or stability? What happens if the global investment community, public and private sector, sours on government bonds as an asset class? There’s good reason for many investors to pull back on government bonds. Why? Increased and burdensome government debt. Great Britain’s debt is forecast by S&P to exceed 100% of gross domestic product (GDP) by 2013, Japan’s debt may exceed 200% of GDP by 2011. The official forecast is that U.S. government debt will remain as low as 80% of GDP by the end of the current budget horizon in 2019, but many investors are doubtful. Yet in all three countries, interest rates on government debt are barely above the immediate rate of inflation. Many analysts speculate that industrial-nation governments will be facing an inflationary period. If these governments were companies, many investors wouldn’t go near their stock.
The Japanese Outlook JGB investors are focused on suggestions that the Japanese government has a plan to buy stocks from the market by using public funds. The government buying stock? As part of a strategy to support sagging share prices, the government of former Prime Minister Taro Yato proposed the use of government funds to purchase stocks and other assets directly from the market.
But the September elevation of Prime Minister Sadakazu Tanigaki ended more than half a century of almost unbroken Liberal Democratic Party rule, and the new administration led by the Democratic Party of Japan is expected to bring major changes to the nation’s governance. What this means for the 10-year JGB futures market is anyone’s guess. Investors will need to consider a complex array of political, government, and economic forces when planning exposure to Japanese government bonds. For information on powerful risk-management tools that allow you to track and measure the risk of global bond futures and options, contact PortfolioScience today. |
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