Notes From Underground: As the dealers in Las Vegas ask, INSURANCE ANYONE?

The RBNZ cut the OVERNIGHT CASH RATE by the expected 50 basis points, although I was very doubtful. Governor Bollard made it clear that the BANK was taking out an insurance policy for the economy until a better assessment can be made about the real impact the earthquake had on New Zealand economic activity. Bollard made it clear that the personal pain for many New Zealanders was very deep and the RBNZ was doing its part to limit further economic dislocation.

The Governor also let it be known that this was a temporary move and if the rebuilding of Christchurch proved an economic stimulus the BANK would respond with the needed remedy. The KIWI had a quick whoosh as the IMM June KIWI contract traded down to 72.59 so that will be a level I would look to find short-term support. As always, I caution that you consult your charts or favorite technician and verify support, either on the KIWI outright or on the CROSSES.

A BLOOMBERG article by Keiko Ujikane and Yumi Ikeda address the huge redemption of Japanese bonds that is taking place in the March. Roughly 16 TRILLION YEN BONDS ($190 billion) are maturing, the largest amount since World War II. The key factor is that the coupons are much higher than the prevailing rates so many institutional investors in Japan, as well as the insurance companies are going to have to replace the higher yielding instruments by either going out further on the curve or by seeking more risky investments in Japanese equities, or by moving more money offshore into higher yielding sovereign investments. It is important to watch the 2/10 Japanese curve to help give us some hint as to see if the Japanese money is staying home and merely moving further down the duration timeline. Today, the Japanese 2/10 was 107 basis points so I advise keeping your eyes on it.

Complicating the situation for traders is that this being March, it is the year-end for Japanese institutions, which always creates volatility as corporates and insurance companies repatriate funds from overseas investments. If the Japanese fall in line with Bernanke’s PORTFOLIO BALANCE CHANNEL, it may be time to sell the middle part of the Japanese curve and buy Nikkei stocks with a high-dividend yield. The effect on the YEN is not readily apparent but may show itself as the March 31 year-end date passes and Japanese pension and insurance funds become more aggressive in their search for yield. Japanese domestic investors have been satisfied with low yields as long as deflation ruled but price pressures will not remain subdued forever.

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4 Responses to “Notes From Underground: As the dealers in Las Vegas ask, INSURANCE ANYONE?”

  1. scat Says:

    pop quiz: at approximately what true count (standard hi-lo) should a blackjack player take insurance?

  2. Bring Lawyers, Guns and Money Points and Figures Says:

    […] at Notes From the Underground, they say to watch the Japanese refunding this month. It’s the largest refunding of Japanese […]

  3. yra Says:

    scat–don’t know as much as i like cards–pot luck at Morse beach I could talk about

  4. Bring Lawyers, Guns and Money Points and Figures Says:

    […] during Notes From a Underground, they contend to watch a Japanese refunding this month. It’s a largest refunding of Japanese debt […]

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