"This Is An Extremely Serious Problem" – Dollar Funding Shortage Hits Record In Japan
By Tyler Durden
It was just over a year ago when we first observed a troubling development in the global currency funding arena:
While Kuroda may ignore the precarious dollar funding shortage, others are far less sanguine: “The jump in basis swaps is an extremely serious problem,” said Hidetoshi Ohashi, the chief credit strategist in Tokyo at Mizuho. “If it continues widening, financial firms will need to reduce their overseas holdings or diversify their investments into other regions.“
Not everyone will be impacted equally, with Japan’s largest banks – Mitsubishi UFJ, Sumitomo Mitsui and Mizuho – likely exempt from rising basis swaps and USD funding shortfalls because they can raise dollar funds by selling bonds overseas, according to Yoshinobu Yamada, a senior analyst at Deutsche Bank AG in Tokyo. However “investors such as life insurers will have problems when they want to put their money in foreign bonds if costs are rising,” Yamada said. Mizuho’s Ohashi said Japan’s regional banks will also be affected.
If not the US, Japanese hot money has another option: Europe, where the ECB lowered negative rates further last week, according to Mizuho’s Ohashi. The premium for yen holders to borrow the single currency until 2021 was 44.8 basis points on Wednesday, less than half the cost to secure dollars. However, yields in Europe are likewise far lower, than in the U.S., which means that when netting out the swap premium the net benefit to investors will likely even out.
Which leaves companies like insurers who have to find way of boosting the yields on their investments in a pickle:
“There are expectations that interest rates might fall further in Europe,” Ohashi said. He said that investors will be interested in bonds of the region’s banks that offer decent extra yields.
Japanese life insurers are stopping sales of insurance products that double as savings vehicles because of their falling returns, according to Tatsuo Majima, an analyst at Tokai Tokyo Financial Holdings Inc.
“It’s a painful thing for life insurers that their returns on foreign investments are falling,” Majima said.
Majima should just complain to the BIS: after all it is this most hypocritical of organizations, whose members are the central banks themselves, that keeps warning about the risks of ongoing easing and central bank intervention, at a time when all four major central banks have just proceeded to engage in major easing, and moments ago the BOJ directly sold Yen in the open market. Surely all that merits at least one more angry letter by the BIS Jaime Caruana?
Source: "This Is An Extremely Serious Problem" – Dollar Funding Shortage Hits Record In Japan
