Berkshire sells ¥263.3 Billion Of Bonds In Its Biggest Yen Debt Deal

Samantha Luan

Economic

Bond

Stocks

Summary:

Berkshire Hathaway's latest yen debt deal is the biggest since its debut sale in the currency in 2019, raising bets it may boost holdings of Japanese stocks.

Warren Buffett’s Berkshire Hathaway priced ¥263.3 billion ($1.71 billion) of bonds in the firm’s largest yen debt deal since its debut sale in the currency in 2019, raising bets it may boost holdings of Japanese stocks.

The seven-tranche deal priced at tighter premiums than Berkshire’s deals over the past two years. It was closely watched by equity-market investors amid speculation that Buffett may be preparing for another foray into Japanese stocks. His previous purchase of stakes in trading firms provided an endorsement of the nation’s shares that helped propel the Nikkei 225 to a record high.

"This is good news for Japanese equities, and may be a buying signal for Japan stocks,” said Takehiko Masuzawa, head of equities trading at Phillip Securities Japan. "This could change the trend of Japanese equities, which have been selling off for profits.”

Buffett said in his annual letter in February that Berkshire has funded most of its investment in Japanese companies through yen bond offerings. Berkshire has said it hopes to eventually own 9.9% of each of the five major trading houses in which it has invested.

The deal was also a key test of appetite for yen-denominated bonds as concern eases in the credit market that the Bank of Japan will raise interest rates again soon. It was one of the biggest yen bond sales by an overseas issuer since the BOJ scrapped the world’s last negative interest-rate regime last month.

Spreads on yen corporate bonds from both domestic and overseas issuers tightened to around 51 basis points on Wednesday, from around 66 basis points a year ago, according to a Bloomberg index.

The size of the deal "was a big surprise,” said Haruyasu Kato, a fund manager in Tokyo at Asset Management One.

The largest tranche of the deal was a three-year note, with Berkshire raising ¥169 billion from that tenor alone, more than it got in total from its last bond sale in November. As an overseas issuer, Berkshire offered a coupon of almost 1% on that tenor, significantly higher than similar-maturity notes sold by Japanese companies, Kato said.

The extra yield was still less than Berkshire’s bond sales over the past two years. For the three-year maturity, for example, the Omaha, Nebraska-based firm offered a spread of 51 basis points over mid swaps, versus 59 basis points in November and 75 basis points in April 2023.

Buffett’s firm is a regular issuer of yen bonds, and has tapped the market twice a year in 2023 and 2022. Here’s a look at how much Berkshire paid on some maturities over the past two years:

The latest bond sale "will be a tailwind for trading company stocks in which Buffett has invested, and if a report showing large shareholdings in bank or insurance stocks as well, it will be a surprise and likely trigger a ‘Buy Japan’ trend,” Phillip Securities’ Masuzawa said.

Berkshire’s stakes in trading firms include 8.58% of Mitsubishi, 7.47% of Itochu and 8.41% of Marubeni, according to the latest information compiled by Bloomberg. Buffett’s equity picks in these companies have outperformed and any renewed backing may give a fresh boost to Japan stocks.

Source:Bloomberg

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Thomas

Economic

The Internaional Monetary Fund World Economic Outlook, projected China's economic growth rate at 4.6% and 4.1% for, respectively, 2024 and 2025. In 2023, after China's economic reopening with the end of the ‘zero-COVID' policy, the rate was 5.2%, above the official target of 5% (Figure 1).

For 2024, the official target has been set at 5% again. Notwithstanding the challenges we discuss here, China's macroeconomic performance in the first quarter of 2024 has been in sync with the official target.

China’s Economic Growth on Target Despite Challenges_1

Six headwinds affecting China's economic growth in the coming years can be identified. The first is the exhaustion of the real-estate sector as a growth factor, after having grown to a quarter of the country's GDP. Restrictions put in place in 2021 by the Chinese government on access to cheap credit for developers because of concerns about the size of the real estate bubble, have not only cut the boom, but have also exposed the fragility of developers' assets, as highlighted by the collapse of developer Evergrande. Since then, there has been a sharp drop in home sales, new construction, and investment in the sector (Figure 2).

China’s Economic Growth on Target Despite Challenges_2

Local government debt is another problem, especially because local government revenues from land sales to real-estate developers have shrunk. The degree of exposure of Chinese banks to both real estate and local government, with possible consequences in terms of loan defaults, could negatively affect the supply of credit to the economy.

The third challenge for growth is a problem with domestic demand by households. Chinese households took on heavy debt to buy real estate during the boom, and spending cuts accompanied the housing turbulence. Even though it increased after the end of Zero-COVID last year, domestic consumption remains on a lower trajectory than before the pandemic. Measures of consumer confidence point to this. Reduced private investment in the domestic market, as well as reduced hiring, have accompanied this retrenchment by domestic consumers.

China’s Economic Growth on Target Despite Challenges_3

What about the external sector as a form of compensation? A fourth challenge to Chinese growth lies in external resistance to such an increase in exports as an alternative, given that they now face resistance that has built up in the wake of the intensification of geopolitical rivalry abroad, especially in relation to the U.S. and other advanced economies.

The Chinese lead in clean-energy technology has, in fact, been accompanied by a strong expansion, for example, in sales of electric cars abroad. Chinese passenger-car exports have surpassed Japan's, at the same time as Chinese companies are seeking to strengthen positions abroad—such as BYD in Brazil, Hungary, and elsewhere. But the risks of facing additional market-access restrictions are high.

A fifth challenge concerns the radical change in the mood of foreign investors. Since the third quarter of 2023, China's balance of payments has recorded a net outflow of almost $12 billion in direct investment, because of asset sales or non-reinvestment of profits. Portfolio investment, that is shares and debt securities, has also changed from positive to negative.

The insufficiency of aggregate demand in China is manifested as deflation in the domestic economy. Consumer prices have been stable or falling for months, and companies have been reducing prices for more than a year (Figure 4, left panel). Idle capacity is high in many sectors, reflecting the excess investments relative to levels of demand (Figure 4, right panel).

China’s Economic Growth on Target Despite Challenges_4

Demography is the sixth challenge. The increase in the supply of workers accompanying rapid urbanization has reached its limits. The long-term decline in the number of births and the ongoing population decline, with a growing share of the population out of the job market, means—as in many other parts of the world—the end of the demographic dividend (Andrade and Canuto, 2024) (Figure 5). The currently high youth unemployment rate means there are workers who can be employed, but this does not change the direction on the trend, or the proportion of Chinese people of non-productive age.

China’s Economic Growth on Target Despite Challenges_5

To understand how the first four challenges above intertwine, it is worth going back to the beginning of the last decade. In December 2011, when I was a World Bank vice president, I was at a ceremony in Beijing in which then-president Hu Jintao made one of the first statements about the need for an inevitable “rebalancing” of the Chinese economy. There would have to be a gradual redirection towards a new growth pattern, he said, no longer associated with investment rates close to 50% of GDP, or with domestic consumption increasing in relation to investments and exports.

Also, Hu Jintao said, an effort would be needed to consolidate local insertion in the highest rungs of the added-value ladder in global value chains, something that was effectively sought. Services should also increase their weight in GDP in relation to manufacturing. There would no longer be the double-digit GDP growth rates of previous decades, but growth would no longer be, as then-premier Wen Jiabao said in 2007, “unstable, unbalanced, uncoordinated, and unsustainable”.

Given the low level of domestic consumption in GDP (a fact that is still present) and, therefore, the dependence on investments and trade balances, the transition would run the risk of experiencing an abrupt drop in the pace of growth. To allay fears of an abrupt slowdown, waves of credit-driven overinvestment in infrastructure and housing followed in later years. A second round was implemented in 2015–2017, in response to a housing slowdown and stock market decline. In addition, of course, expansion policies were adopted during the pandemic crisis in 2020.

In effect, the decline in Chinese GDP growth rates occurred only gradually to 6% in 2019. Now, however, the lever of overinvestment in real estate and infrastructure is running out, not only because of the debt levels that accompanied its extensive use, but also because, at the margin, its returns in terms of GDP growth represented a declining contribution.

Two reforms would have a strong effect on growth (Canuto, 2022). First, social protection should be reinforced to convince Chinese people to save less. Furthermore, the proposal made by Hu Jintao in 2011—and left aside by Xi Jinping—to “rebalance” public and private companies should be revived, with a consequent gain in productivity because of the differences favorable to the latter shown where they operate together.

Such reforms do not seem to be on the horizon. However, despite the challenges outlined here, China's economic growth path remained steady in the first quarter of 2024. Exports, manufacturing investment, and travel-related consumer spending compensated for the drag from the property sector (Figure 6), so far increasing the chances of achieving the target of “around 5%” GDP growth this year.

China’s Economic Growth on Target Despite Challenges_6

Source: Policy Center

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Cohen

Bond

Economic

Following last week's “hotter” than expected CPI release, the sole focus for the money and bond markets was to, yet again, dial back their Fed rate cut expectations. However, there is another aspect of Fed policy decision-making that has been flying under the radar, and that involves its balance sheet. With the May 1 FOMC meeting only two weeks away, I thought it would be a good idea to discuss this part of monetary policy because, at this point, it appears as if this facet may make headlines well before actual rate cuts do.

So, what exactly am I referring to when talking about the Fed's balance sheet? The simple answer is the Securities Held Outright line items. For a little Fed Balance Sheet 101, this is also known as the System Open Market Account or SOMA. The reader probably is more familiar with the terms quantitative easing (QE) and quantitative tightening (QT) when addressing the Fed's balance sheet.

Securities Held Outright by the Fed

Recall that while the policy maker was busy implementing historic rate hikes from 2022–2023, it was also reducing its holdings of Treasuries and mortgage-backed securities (MBS), which had ballooned in size as a result of the COVID-19-related QE program. This latter portion of monetary policy tightening was QT. Fast-forward to the present, and it appears as if the FOMC is ready to start paring back the pace of QT, even if it is not ready to start implementing rate cuts.

Let's look at the Fed's securities holdings to get some perspective on how the current QT program has been working. At its peak, SOMA reached as high as $8.5 trillion in May 2022, and since QT went into effect in June of that year, total holdings have dropped more than $1.5 trillion to $6.97 trillion as of this writing. This reduction is the result of the Fed's present plan to let its Treasury and MBS positions roll off by a combined $95 billion per month. Remember, the Fed is not outright selling any securities; it is just not reinvesting the total amount of holdings that are maturing or being redeemed.

Based on last week's release of the March FOMC minutes, the Fed seems to be considering reducing the aforementioned roll-off amount in half, which could amount to roughly $50 billion per month. In addition, the policy maker's preference seems to be to pare back only the pace of QT that includes the Treasuries portion of its overall holdings, not MBS.

Interestingly, several Fed officials have gone on record that the ultimate goal would be to have only Treasury securities on its balance sheet. However, this could take quite some time, as the Fed's balance sheet is holding nearly $2.4 trillion in MBS, and the current pace of the roll-off here is $35 billion per month.

Conclusion

While the money and bond markets await guidance on rate cuts, they may be getting another announcement as soon as the upcoming May FOMC meeting that a “QT taper” is on the immediate horizon instead.

Source: Wisdomtree

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Warren Takunda

Economic

Forex

Volatility-linked investment strategies are joining the nascent sell-off in U.S. stocks and could help accelerate declines if market gyrations keep increasing.

Volatility control funds - systematic investment strategies that typically buy equities when markets are calm and sell when they grow turbulent - hoovered up stocks as the S&P 500 marched to record highs this year.

With the S&P 500 now off more than 4% from those levels and the Cboe Volatility Index, opens new tab near its highest point since October, some of these funds are once again becoming sellers.

Though the S&P 500 is still up about 5% year-to-date, further gyrations could trigger more selling from the funds: analysts at Nomura estimate the strategies could dump some $45 billion worth of stocks if the S&P 500 averages daily moves of 1% over the next two weeks.

"Their positioning is clearly above average,” said Parag Thatte, a strategist at Deutsche Bank. "There is room for them to pull back in terms of exposure."

Nomura's Charlie McElligott estimates that volatility control funds have already started selling, shedding about $16.2 billion in equity exposure over the last week.

While that is small compared with the S&P 500’s $42 trillion market capitalization, the funds’ tendency to follow market momentum can sometimes exaggerate stock moves, market participants said. Other, slower moving strategies could also join in if volatility increases.

U.S. stocks fell in choppy trading on Wednesday as investors continued to assess the timing of rate cuts and after a batch of soft corporate earnings.

The market's recent swings were preceded by a long period of calm in which investors piled in to equities, driven by evidence of strong-yet-stable economic growth and expectations that the Fed would deliver several rate cuts this year. The VIX has not risen over the 20 mark - a level associated with healthy demand for portfolio hedges - for 120 sessions, the longest such streak since 2018.

Stock gyrations have increased in recent weeks as hopes for rate cuts fade in the face of stronger-than-expected inflation. Those worries have been exacerbated as a spreading conflict in the Middle East drives up oil prices, threatening to push inflation higher.

Volatility has picked up in other asset classes as well. The MOVE index (.MOVE), opens new tab, measuring expected volatility in U.S. Treasuries, stands at a three-month high following a steady rise in Treasury yields. The Deutsche Bank FX Volatility Index (.DBCVIX), opens new tab, a measure of currency market swings, has climbed to a near 10-week high in the face of a rally in the U.S. dollar.

"The volatility increase we're seeing is across asset classes," said Mandy Xu, head of derivatives market intelligence at Cboe Global Markets. "I think it is the market waking up to potential downside risk."

One reason that selling from volatility-control funds has not kicked in to higher gear so far is that the declines in the S&P 500 have been relatively measured, Barclays strategists wrote.

However, “the funds are quite susceptible to a massive unwinding from the currently high level of equity allocation, particularly if volatility reprices higher in case inflation keeps surprising to the upside, limiting the Fed's ability to cut rates," according to Barclays.

Volatility control funds have a relatively short fuse compared with other computer-driven strategies, making them among the first to react when the market landscape changes.

A more pronounced jump in volatility could also activate slower-reacting funds that use volatility as a trading signal, including commodity trading advisers and risk parity funds, piling more pressure on the market as they ramped up selling.

Nomura’s McElligott said CTAs could sell some $31 billion in equities if the S&P 500 falls another 2% to around the 4,914 level in the weeks ahead.

One catalyst for such moves could be corporate earnings season, which kicked in to gear last week. Investors next week will be bracing for earnings from a slew of technology and growth heavyweights, including Tesla (TSLA.O), opens new tab, Meta Platforms (META.O), opens new tab, Microsoft (MSFT.O), opens new tab and Google parent Alphabet (GOOGL.O), opens new tab. The U.S. will also get a look at another inflation measure on April 26, when the personal consumption expenditures index is released.

"Volatility control has been the larger force to date with regard to systematic deleveraging ... during this choppy pullback," McElligott said. "CTAs join the party in the coming weeks if weakness persists."

Source: Reuters

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Samantha Luan

Economic

On Tuesday, during a public appearance with Bank of Canada governor Tiff Macklem in Washington, D.C., Powell said it was too early for the Federal Reserve to consider rate cuts because inflation hasn’t been low enough, for long enough.

“Right now, given the strength of the labor market and the progress on inflation, it’s appropriate to allow restrictive policy further time to work and let the data and evolving outlook guide us,” Powell said.

Powell’s remarks came after a third straight higher-than-expected inflation report that scuttled many Wall Street predictions of upcoming rate cuts. The economy remains resilient, fighting through the high interest rate environment, but with inflation refusing to budge, economists and analysts started to wonder if the soft landing would happen. Maybe unemployment would have to go up for inflation to come down to the Fed’s 2% target?

Not for Goldman Sachs, though. Despite the pessimism caused by March’s inflation figures, the bank remains steadfast in predicting a soft landing. Inflation in March was 3.5%, but Goldman believes that high rate resulted from “an unusually large number of special factors,” chief economist Jan Hatzius wrote in an analyst note Tuesday.

Specifically, Hatzius was referring to the January effect, a phenomenon where stock prices tend to rise in January more than in any other month, as well as a blip in the home rental market that made it seem as though rents were poised to shoot up. Both of these have since proved to be temporary. “As the special factors unwind, we expect sequential inflation to slow anew,” Hatzius wrote.

More important, though, Goldman doesn’t see signs of imminent layoffs, which would certainly be a red flag that the soft landing was turning into a crash landing. To support his theory, Hatzius points to the number of new jobs the economy added in March and the fact that multiple data sources don’t show rampant layoffs. In short, Goldman is sticking with its soft landing call because it believes stubborn inflation was a several-months-long anomaly and the labor market is showing no signs of precarity.

The latest employment data smashed expectations when it showed the U.S. added 303,000 jobs last month, while economists expected only 200,000. At the same time, Hatzius points out that widespread job cuts “remain muted,” citing data from the Labor Department, the research firm Challenger, Gray & Christmas, and WARN notices, which are legal documents employers must file in the lead-up to a mass layoff.

Hatzius has long supported the view that the U.S. is heading toward a soft landing. In March, he told CNN the U.S. was “nowhere near a recession,” because prices had come down without any meaningful slowdown in spending.

Despite recent bumps, inflation continues heading in the right direction, mostly thanks to continued consumer spending, precisely because the labor market is stabilizing. In 2020, employment went through the shocks of the pandemic, and countless workers in hospitality and travel found themselves out of a job. Then the market overcorrected with employers barely able to find enough employees, forcing them to offer eye-popping salaries to recruit talent.

Now, though, the job market is relatively stable, according to Hatzius’s analysis. Unemployment rate has been below 4% for 26 months, the longest streak since the 1960s. Powell, too, seemed confident in the labor market, saying it had “solid growth and continued strength” on Tuesday.

In contrast with the post-pandemic period, more workers today are staying put. Economists could debate whether that’s a sign that fear is creeping in or that things are finally back to normal. Quit rates are down, but employers are filling more jobs than they have in years. On balance, though, a less frothy job market means workers won’t be able to find a new job as easily as in the past. “New entrants into the workforce may have to search longer before they find a job,” Hatzius wrote.

Ultimately, Goldman does expect inflation to continue to fall, estimating that it will stall out at around 2.5% by the end of the year. However, the economy won’t hit the 2% number the Fed is eyeing until 2025. Across Wall Street, analysts still forecast lingering inflation. JPMorgan, for example, expects it to hover around 3% all year, according to a February report. For the most part, even the most concerned economists who adjusted their forecasts upward after the March inflation data still see it coming down overall. Meaning inflation will drop, just not as fast as hoped.

Source: Fortune

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Cohen

Economic

Central Bank

Discussing the state of the European economy and geopolitical challenges, she emphasised the need for about €600 billion annually to support climate change mitigation efforts, underlining the critical role of private financial support for these initiatives.

Lagarde also provided insight into the current state of the European economy, the ongoing efforts in US-EU economic cooperation, and the broader implications of geopolitical challenges.

Inflation dynamics and Eurozone economic outlook

Addressing the query on why Europe has managed inflation better than the United States, despite facing higher energy price shocks, Lagarde pointed out, "It's not over yet. We're dealing with two different kinds of inflation."

"The employment and the unemployment rates in Europe are as good as they have ever been," Lagarde stated, pointing to a robust job market as a silver lining amidst economic uncertainties.

Looking ahead, she expressed cautious optimism about the eurozone’s recovery trajectory, predicting gradual improvements through 2024.

Eurozone's growth compared to the United States

Lagarde addressed the significant disparity in economic growth between the eurozone and the United States. Since 2008, the US economy has grown 75% larger than that of the eurozone.

She attributed this to several factors, including the "second wave of crisis" in Europe, such as the sovereign debt crisis, and the lack of a fiscal union to complement its monetary framework.

A stark productivity gap was also underscored, with United States’ productivity growth markedly outpacing Europe's.

"It's just mind-boggling; productivity in the United States between 2019 and now has been 6%, in Europe 0.6%," Lagarde remarked, calling for comprehensive structural reforms and better integration of the single market to bridge this divide.

European economic independence and global geopolitical challenges

Considering the ongoing economic and geopolitical crises, Lagarde sees potential for Europe to forge a more autonomous economic path.

She emphasised the importance of developing a robust, internally-focused financial infrastructure to support innovation and entrepreneurship within the continent, suggesting that such initiatives could act as catalysts for significant economic reform, particularly in adapting to and mitigating climate change.

"We are at the cusp of that needed transformation," she affirmed, highlighting the necessity of private investment in Europe’s green transition, which she estimates requires about €600 billion annually.

Lagarde reiterated that European political commitment to addressing the climate change issue is unwavering and urgently requires financial support.

“That will require private money, private capital savings to be invested in that transformation.”

The dialogue also turned towards a broader discussion on global economic relations, particularly concerning China and the implications of its evolving economic strategy.

Lagarde underscored the importance of continued collaboration between trusted global partners, rather than pursuing protectionist policies or competitive subsidisation, which she described as a "race to the bottom."

As for the controversial topic of utilising frozen Russian assets to aid Ukraine, Lagarde emphasised that “there is not a single doubt anywhere in Europe” in Europe that Russia should financially compensate for the damages inflicted on Ukraine.

However, she cautioned against moving from freezing assets to confiscating them without careful consideration. She explained that while there is consensus on the principle of using these assets for reconstruction, precipitating their availability due to lack of alternative financing raises complex legal and financial stability issues.

Monetary policy amidst market challenges

On the topic of potentially changing ECB's 2% inflation target, President Lagarde reaffirmed her commitment to price stability, resisting any immediate changes to the existing frameworks.

"You don't change the rules of the game in the middle of the game," she stated, advocating for a steady approach to managing Europe's inflation rates.

The role of AI in shaping Europe’s future

When assessing the impact of artificial intelligence on productivity and labor markets, Lagarde commented, “I think that it's a time in our life when a massive innovation with potential significant transformative power is accelerating its development, its launch, its applications in a way that I don't think could have been expected or that we have seen in the past.”

“For the moment, I’m not risk averse. I'm not risk averse, but I'm cognisant of the fact that it can create probably as many benefits as it will create risks,” she said.

Source:euronews

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Thomas

Economic

Forex

The Australian Dollar rose against the U.S. Dollar, Pound and other currencies after Australia reported employment shrank by 6.6K in March, disappointing against expectations for a reading of +7.2K.

But it was the upgrade to February's bumper job growth that saw the Aussie Dollar turn higher in the aftermath of the report. The ABS revised the February print to 117.6K from 116.5K, confirming a robust jobs market that should keep the Reserve Bank of Australia vigilant against calls to cut interest rates.

"The March LFS incorporated somewhat of a ‘pay-back' from an incredibly strong February, but on balance, it provided a slightly better read on the underlying state of labour market conditions over the opening quarter," says Ryan Wells, an economist at Westpac.

The Pound to Australian Dollar is at 1.9338 following the employment report, while the Aussie Dollar is a quarter per cent higher against the broadly softer U.S. Dollar at 0.6451, with gains coming amidst a more supportive global backdrop.

"AUD/USD experienced some volatility around the release of the Australian labour force data," says Carol Kong, a currency strategist at Commonwealth Bank of Australia.

Investor morale has improved through the middle portion of this week, boosting bonds, stocks and risk-on currencies such as the Australian Dollar.

"Asian markets were making solid gains across the board on Thursday," says Shane Strowmatt, an analyst at LGT Private Banking. "A sense of calm was returning to markets midweek after several sessions dominated by negative sentiment, which was exacerbated by negative geopolitical headlines out of the Middle East."

The Australian Dollar and equity markets have struggled of late as investors have cut back expectations for the number of U.S. interest rate hikes in 2024 to just one, having seen as many as seven at the start of the year. This repricing has run its course for now, offering potential short-term comeback opportunities to stocks and the Aussie Dollar.

"The market has already gone far in its expectations for key interest rates in the US," says Antje Praefcke, FX Analyst at Commerzbank. The analyst says this is by no means a turning point for markets and she expects further gains for the Dollar, albeit at a more gradual pace than we have seen of late.

Any continued rise in the U.S. Dollar would speak of difficult global market conditions that should keep Australian Dollar upside limited.

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