Friday, June 11, 2010

Thursday, June 3, 2010

Between Bullishness and Bearishness in Bond Markets

May has proven to be risk-awareness month for bond traders, as the 3-month, 5-year, and 10-year yields all experienced significant declines as traders withdrew from corporate debt markets and saturated Treasury markets.


A rise in the perceived riskiness of corporate debt encouraged traders to reduce demand for corporate bonds and increase demand for Treasury instruments, causing Treasury prices to rise and Treasury yields to drop as the supply of loanable funds increased.
"As a result," according to Investor's Business Daily, "Treasury bond funds soared in May. They gained 3.48% on average, according to preliminary data from Lipper Inc. Funds owning agency-backed securities scored gains too."

No doubt, the recent activity within the bond markets can be attributed to the debt crisis in Europe. Treasury bills, bonds, and notes are considered to be safe-haven instruments, as reflected by their routinely stellar credit ratings. However, Treasury prices fell yesterday and it appears that Treasury yields are on the rise again. According to Reuters, "
Benchmark 10-year notes US10YT=RR were down 15/32 in price at 101-18/32 after rising to a session high of 102-2/32. Their yield, which moves inversely to price, was 3.32 percent, up 5 basis points from late on Tuesday but still far below the high of 4.00 percent hit in early April." This indicates that perhaps a mild bullishness exists among traders.

Tuesday, June 1, 2010

Japanese Govenerment to Exempt Foreign Investors from the Corporate Bond Tax

Good news from Japan. According to Reuters, the Japanese Financial Services Agency is seeking to temporarily exempt foreign investors from paying the corporate bond tax on Japanese bonds. Why? According to the FSA, the corporate bond tax is a 15% fee withheld from the interest income earned from holding Japanese bonds. According to Reuters, "Out of some 68.1 trillion yen ($748 billion) in Japanese corporate bonds outstanding as of March 2009, foreigners held a mere 0.6 percent." FSA officials believe that the corporate bond tax is but one cause of this diminutive attention from foreign investors.

If the goal of the FSA is to increase the demand for Japanese bonds, then removing the corporate bond tax is an appropriate decision. Ceteris paribus, if taxes imposed upon the bond-interest earned by bondholders (lenders why purchase bonds) decrease, then the wealth of bondholders and the expected returns on bonds will increase. Furthermore, if the wealth of bondholders and the expected returns on bonds increase, then the demand for bonds will increase as well since these are determinants of bond demand.

Moreover, if the demand for bonds increases, then the supply of loanable funds will increase, since every bond transaction involves an exchange of loanable funds from bondholders to bond issuers. The exemption proves to be a step in the right direction for Japan, especially since it will enhance Japan's competitiveness with nations like Germany, Britain, France and the U.S. where such taxes on foreigners are non-existent.

-Kitano, Masayuki, and Naoyuki Katayama. "Japan to Exempt Foreigners from Corporate Bond Tax | Reuters." Business & Financial News, Breaking US & International News | 01 June 2010. Web. 02 June 2010.