Sell Default Protection on Japan Government Bonds, Credit Agricole Says
Investors should sell credit-default swaps on Japanese government debt because prices overlook the nation’s improving economic growth outlook, according to Credit Agricole SA.
“This is a very strong investment opportunity at the moment,” Vincent Thebault, head of debt and credit markets for Japan at Credit Agricole CIB, said in an interview yesterday at his Tokyo office. “Japan will really do all it can to avoid a default. In the short term, it seems there is a very low probability for Japan to default.”
The cost of insuring Japanese sovereign debt with credit- default swaps hit 99.7 basis points on May 25, the highest in more than a year, according to data provider CMA. It almost tripled between August 2009 and May 2010, and rose 1 basis point to 70 basis points yesterday. Five-year government bonds yield 0.36 percent.
Japan is the world’s most indebted nation, Bank for International Settlements figures show. Investors worldwide have focused on the threat of default by indebted countries. The European Union announced a rescue package in May of almost $1 trillion, with support from the International Monetary Fund, to shore up the finances of the euro area’s weakest economies, such as Greece and Portugal.
Thebault recommends a strategy of offering protection against default, exploiting a rise in Japanese government credit-default swap costs across different maturities. “Some may think Japanese credit-default swaps should be higher, and buy protection,” he said.
Growth Improves
Credit Agricole suggests international investors have overlooked “domestic fundamentals” in their concern over Japan’s debt levels.
Japanese policy makers raised the growth forecast for the year ending March 2011 to 2.6 percent, from the 1.8 percent estimated in April, the central bank said in a July 15 statement.
Borrowings are approaching 200 percent of gross domestic product, the highest ratio in the Organization for Economic Cooperation and Development, government figures show. Japan racked up liabilities to try to spend its way out of economic stagnation and deflation following the burst of an asset-price bubble 20 years ago.
Japanese government bonds are mostly held by domestic investors who are “used to low rates and keep buying,” said Thebault.
Credit swaps pay the buyer face value if a borrower fails to meet its obligations, less the value of the defaulted debt, and typically rise as investor confidence deteriorates.
To contact the reporters on this story: Yusuke Miyazawa in Tokyo at ymiyazawa3@bloomberg.net;
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