TAIWAN: Viewpoint On Taiwanese Insurers And Underwater Bonds
Jul-02 03:35
Brad Setser has written a blog asking why the Taiwanese Central Bank is intervening to slow the appreciation of the Taiwan dollar. He opines - possibly because the lifers are sitting on a ton of underwater bonds, and that limits their ability to hedge and/or absorb currency losses. See below for some key snippets.
- “Realistically, the insurers’ approximately $600 billion foreign bond portfolio has a current market value 10-15 percent below its book value (the insurers have around $700 billion in foreign assets, but do hold a few equities, so not all their foreign assets are in bonds).”
- “Bottom line: Taiwan’s life insurers cannot sell their bonds now (and realize the mark-to-market loss) without depleting their regulatory capital.”
- “One critical implication: the insurers cannot hedge the bulk of their portfolio against the risk of future foreign currency moves without killing their income and running ongoing losses, which would also eat into their equity capital.”
- “If they hedge most of the foreign bond portfolio, the net dollar yield on the portfolio won’t cover the promised TWD payout to the domestic policy holders.”
- ‘If they don’t hedge, any further Taiwan dollar appreciation will eat directly into the life insurers capital—or rather it would under normal accounting rules (the lifers want the flexibility to NOT have to mark their bond portfolio for either bond or currency market moves).”
- “As a result, the lifers preferred solution to their dilemma is just to have Taiwan’s central bank block any further appreciation.”
- “That is in fact what the Central Bank of the Republic of China (Taiwan) did in the month of May. $10 billion in reserve accumulation in a month is a lot, it works out to $120 billion a year—or an annualized rate of intervention equal to 15 percent of Taiwan’s GDP.”
- “That’s Taiwan’s policy dilemma. To avoid an “Asian crisis in reverse” Taiwan’s central bank has to keep the Taiwan dollar weak. But keeping the Taiwan dollar weak dooms Taiwan to maintaining a massive external surplus and accumulating an ever-increasing stock of foreign assets that are being bought at artificially inflated prices. It basically means more future losses—and of course, it also means standing in the way of the adjustment in trade balances that the Trump Administration wants (though the Administration wants conflicting things.”
Want to read more?
Find more articles and bullets on these widgets:
Historical bullets
JGBS: Belly Leads Yields Modestly Higher At Lunch
Jun-02 03:18
At the Tokyo lunch break, JGB futures are weaker, -15 compared to the settlement levels.
- Japan's Prime Minister Shigeru Ishiba announced a minister-level meeting to address the supply of rice and stabilise its price ahead of a summer election.
- “Asset managers’ decision to add to their long yen position through the week ended May 27 is looking a wise one, with the currency back in rally mode and poised to gain more.” (per BBG)
- Cash US tsys have twist-steepened, with yields -1bp lower to 2bps higher, in today's Asia-Pac session. Monday's US calendar sees ISM Manufacturing data and an appearance by Fed Chair Powell, with the June employment report looming at the end of next week.
- Cash JGBs are flat to 2bps cheaper across benchmarks, with the 5-7-year zone underperforming. The benchmark 10-year yield is 1.5bp higher at 1.516% versus the cycle high of 1.596%.
- Swap rates are flat to 1bp higher. Swap spreads are little changed.
CHINA: VIEW: JP Morgan Sees Some Easing In External Pressures
Jun-02 02:39
There was a slight improvement in China’s May NBS PMIs with the composite rising 0.2 points to 50.4, holding above the breakeven 50-mark. JP Morgan believes that there should be some “easing” in “near-term external pressure”. It’s “baseline scenario assumes China’s growth to moderate to an average 3%q/q saar pace through the rest of the year, with full-year 2025 GDP growth at 4.8%yoy.”
- JP Morgan sees “the main challenges to the Chinese economy coming from structural imbalance between production, consumption and investment, and deflation pressure, calling for ongoing growth-support measures.”
- “The manufacturing PMI recovered 0.5-pt to 49.5 upon US-China tariff de-escalation, though non-manufacturing PMI fell modestly by 0.1-pt to a 50.3 (four-month low). In all, the composite PMI rose 0.2-pt to 50.4.”
- “The export orders component of the manufacturing PMI recovered by 2.8-pt to 47.5 upon tariff de-escalation, as surveyed corporates reported a notable rebound in export demand from the US market. The new orders and output components also ticked up in May.”
- “The future output component recovered moderately in May, suggesting moderate improvement in manufacturers’ sentiment amid tariff de-escalation and easing of near-term external pressure.”
- “While there have been growing concerns that escalating tariff risks could hit employment notably, it is encouraging to note that labor market conditions seem to have stabilized somewhat amid a near-term improvement in export sector sentiment.”
- “The pricing components of the manufacturing PMI eased further in May, suggesting lingering deflation pressure.”
- “The service activity index edged up 0.1-pt to a still subdued level of 50.2, with major drags from the real estate service sector and financial services.”
AUSSIE BONDS: Modestly Cheaper, Subdued Session
Jun-02 02:18
ACGBs (YM -1.0 & XM -2.0) are modestly cheaper after today’s domestic data drop.
- ANZ job advertisements fell 1.2% m/m in May versus a revised -0.3% in April.
- MI inflation index fell 0.4% m/m in May versus +0.6% in April. Inflation index rose 2.6% y/y versus +3.3% in April.
- S&P Global manufacturing PMI falls to 51 from 51.7 in April.
- Cash US tsys have bear-steepened, with yields flat to 3bps higher, in today's Asia-Pac session.
- (MNI) The Federal Reserve should aim for a much smaller balance sheet in order to have a smaller footprint in financial markets and reduce the risk of inflationary bursts like the one experienced after Covid, former Fed Board Governor Kevin Warsh said Friday. The Fed's balance sheet "is trillions larger than it needs to be. We can't make this change overnight," said Warsh, who is seen as a leading candidate to replace Jerome Powell as Fed chair next year.
- Cash ACGBs are 1-2bps cheaper with the AU-US 10-year yield differential -14bps.
- RBA-dated OIS pricing is little changed across meetings today. A 25bp rate cut in July is given a 71% probability, with a cumulative 76bps of easing priced by year-end.
