Date: Thu, 17 Feb 2000 14:11:02 -0500 (EST) From: Rakesh Bhandari <bhandari at phoenix.Princeton.EDU> To: lbo-talk at lists.panix.com Subject: NYT/WSJ on bonds today Message-ID: <Pine.SOL.4.10.10002171407070.17235-100000 at yuma.Princeton.EDU> MIME-Version: 1.0 Content-Type: TEXT/PLAIN; charset=US-ASCII
Seth has pointed out to me privately that it seems contradictory that I take both deficits (Japan's) and surpluses (the US') as an indication of the limits of the mixed economy. I will indeed have to think about this. First article about Japan; second on buy back of US treasury debt. Best, Rakesh -----------------------------------------
Moody's Might Cut
Government-Debt
Rating for Japan
By Peter Landers
02/17/2000
The Wall Street Journal
Page A2
(Copyright (c) 2000, Dow Jones & Company, Inc.)
TOKYO -- Moody's Investors Service Inc. warned it may cut Japan's government-debt rating for the second time in two years, underlining international concern about Japan's skyrocketing budget deficits.
Moody's said it has placed Japan's government debt on "review for possible downgrade." In November 1998, Moody's lowered Japanese government bonds to Aa1, the second-highest rating, from triple-A, the highest. The ratings agency said a final decision on a second downgrade probably would come within one to three months.
A ratings downgrade, which would affect Japanese-yen debt, would apply only to bonds issued or guaranteed by the Japanese government. That market, though vast, has few foreign investors. Only about 6% of the 310 trillion yen ($2.842 trillion) government-bond market is owned
by foreigners. But the Moody's warning could be a blow to Japan, because it would drive up the cost of servicing the national deficit.
Zembei Mizoguchi, a top official at the Ministry of Finance, said he had no comment on the Moody's review.
Japan has gone deeply into debt in the past two years to finance public-works projects and other programs to bring the country out of its worst recession since World War II. This year, Japan's government debt outstanding will surpass that of the U.S., an economy twice the size of Japan.
The Ministry of Finance estimates that the total debt of the central government and local governments will reach 645 trillion yen by March 31, 2001, making Japan the most-indebted nation relative to its size among the leading industrialized countries.
"There's a rapid buildup of debt needed to maintain a reasonable level of economic activity," said Vincent Truglia, managing director of sovereign risk at Moody's. "What we're concerned about is when the country can return to sustainable growth absent fiscal stimulus."
At the same time, Moody's confirmed the Aa1 country ceiling for Japanese corporate debt in foreign currencies and the Aa1 rating for government-guaranteed debt issued overseas in yen. The country ceiling is the maximum possible rating for a Japanese company. Mr. Truglia said Moody's sees a "slight marginal differential" between Japan's domestic and overseas obligations. In a worst-case scenario, where Japan found itself unable to pay all its debts, it might put priority on paying overseas creditors first, he explained.
Moody's noted that Japan has many strengths, too, such as a large current-account surplus and a high rate of saving. Japanese officials, citing these factors, have said they aren't concerned about Japan's ability to pay its debts. Several other ratings agencies have kept Japan's rating at triple-A.
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Business/Financial Desk; Section C
THE MARKETS: Market Place
Shrinking Treasury Debt Creates Uncertain World
By GRETCHEN MORGENSON
02/17/2000
The New York Times
Page 1, Column 2
c. 2000 New York Times Company
Lawrence H. Summers, secretary of the Treasury, is clearly relishing his role as the man who put the nation on a no-debt diet. In Congressional
testimony last week, Mr. Summers predicted that by 2013, the $3.6 trillion in Treasury debt held by the public would be eliminated,
repurchased by funds from budget surpluses that the roaring American economy has wrought. The result, he said, will be an even stronger
economy and lower interest rates for all.
Maybe so. But in the meantime, the Treasury's plan to reduce its debt is roiling the financial markets and raising the prospect of far-reaching,
unintended effects on the economy and investors.
One immediate effect of the shrinking Treasury debt market, economists say, is to make it tougher for the Federal Reserve Board to cool the
economy because as it raises short-term interest rates, long-term rates are not rising in tandem.
In addition, the debt securities that remain in the shrinking market are expected to be much more prone to wild swings in price and thereby
riskier for investors.
Finally, corporations will probably issue more debt to fill the public demand for bonds, creating a debt burden that could make it much more
difficult for the nation to shake off a downturn in the economy.
''The surplus has forced the Treasury to change the way they do business, and we are looking at the consequences,'' said Ward McCarthy,
principal at Stone & McCarthy Research Associates in Princeton, N.J. ''It affects everybody.''
Because the market for Treasury debt is the largest and most heavily traded in the world, and because investors evaluate almost every other
type of bond using a Treasury security as a benchmark, even the smallest change in the government's financing has effects at home and abroad.
''One of the reasons the U.S. has been the dominant factor in the world is we were the only place with a deep, liquid debt market,'' said Stan
Jonas, managing director at FIMAT U.S.A., a brokerage firm in New York. ''We would not be the leader in the financial marketplace if we hadn't
had the advantage of a huge, rich Treasury market. Now that market is disappearing.''
The ripples from a vanishing public market for Treasury debt have begun to hit investors who buy bonds and the companies that issue them.
Last month, when the Treasury outlined its aggressive plan to reduce the debt it issues and to buy back debt already in investors' hands, the
market went haywire. There was a mad rush for long-term government bonds, driving down interest rates on long-term government debt even as
the Federal Reserve Board was raising short-term rates to try to cool down an overheated economy.
This created significant losses for investors, who had bet that the Fed's increases in short-term rates would cause rates at the long end of the market to rise as well. Instead, the effective rate on 30-year bonds fell well below that of 2-year notes. Normally, investors are given extra
incentive in the form of higher rates to lock up their money for a longer period.
More important, economists and market strategists say, the Treasury's plan and the ensuing rush to long-term bonds are throwing sand into the
gears that the Fed uses to keep the economy perking while protecting against inflation.
Alan Greenspan, the Fed chairman, who is scheduled to testify today as part of his twice-a-year report to Congress, has raised short-term rates
three times since last June in an effort to slow the economy. But rates on long-term Treasury securities have fallen.
''It poses a little bit of a challenge for monetary policy,'' said Henry Kaufman, the noted Wall Street economist.
Few economists say the Treasury's overall plan to reduce the nation's debt is wrongheaded. Last year's budget surplus of $124 billion, the
largest ever, was a direct result of a supercharged economy and a roaring stock market, which generated huge tax receipts. As long as the
economy and stock markets remain hot and Congress keeps a lid on spending, budget surpluses will continue. Reducing debt, the government
argues, is a natural use for these funds.
To be sure, the government will still issue debt to be held by the Federal Reserve and the Social Security trust. It is the publicly held debt that is set for extinction.
Although the Treasury securities market is the world's largest and most influential, it wasn't always thus. In the 1960's, for example, when an
investor asked what the bond market was doing, the answer usually involved the price action in an AT&T bond or an obligation of a highly
rated electric utility.
But as the United States government grew and the Treasury began to borrow more to finance the growth, the significance of the Treasury
securities market rose as well. In the 1980's and 1990's, the Treasury raised trillions of dollars each year from investors by issuing bonds, notes and bills; the peak came in 1996, when the Treasury auctioned $2.5 trillion in securities.
By fiscal 1998, according to the Treasury, federal debt held by the public had risen to $3.7 trillion, up from $2.1 trillion just 10 years earlier.
But the days of ballooning Treasury debt are over. Eliminating the publicly held Treasury debt by 2013, Mr. Summers said, will put downward pressure on all interest rates, helping to reduce consumer payments on home mortgages, car loans and other forms of credit. This has not happened yet. Most consumer borrowings are based upon shorter-term interest rates -- even 30-year mortgage rates are based on shorter-term rates because homeowners typically pay off their loans well before their term is up -- and these are rising because of the Fed's recent actions.
Where the effects have been felt sharply are in the corporate bond and mortgage markets. A 30-year corporate bond is usually judged against a 30-year Treasury. But with Treasuries being hoarded ahead of a possible shortage, the rates on the bonds no longer represent a good comparison. As a result, the private debt market has lost its anchor.
Wall Street will undoubtedly create a new security to use as a benchmark for bond issues soon. But until then, uncertainty will rule the market.
As a result, investors are having trouble assessing new bond issues and are acting with caution. ''I think everybody has thrown up their hands at
the moment,'' said Carol Levenson, editor of Gimme Credit, a research service that analyzes high-grade corporate bonds. ''The market is waiting
to see if things are going to return to normal.''
Trading has also dropped off recently in the vast market for mortgage obligations, which are backed by consumer loans, according to Mickey
Levy, the chief economist at BankAmerica. ''With higher risk in this market, it could make rates higher on the margin,'' he said, for the moment, just the opposite of what Mr. Summers has predicted.
Some strategists suspect that the bond market may never return to normal. ''One byproduct of a consequential shrinkage of the Treasury market is that the U.S. debt markets will be increasingly comprised of a variety of securities that are riskier than Treasury debt,'' Mr. McCarthy said. ''So in addition to increased volatility, we are dealing with almost by definition a riskier bond market as well.''
This is quite a change, given that much of the bond market has been a refuge for investors seeking safety and security in their holdings. Few are confident that investors have recognized the increased risks they will need to take when they invest in bonds as the Treasury bows out of the market and corporate issuers take its place.
Moreover, investors may not recognize the implications of a big increase in corporate debt when the nation experiences a recession. ''When you go into an economic slowdown and there is a large amount of government debt outstanding and a small amount of corporate debt outstanding, that's not a problem,'' Mr. Kaufman explained. ''All you need is an easing in monetary policy and off we go again. But when the private sector is heavily burdened when we slow down, that will require more stimulation. This is a concern.''
One economist worried that using the budget surplus to finance a buyback of existing Treasury debt could cause inflation. Robert H. Parks, a
professor of finance at the Lubin Graduate School of Business at Pace University, said: ''This increases the money supply, and it also increases the reserves of private financial institutions. It is highly expansionary and potentially inflationary in an economy that is roaring ahead.''
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