StanCollender'sCapitalGainsandGames Washington, Wall Street and Everything in Between

Japanese Investors Say There's An Increased Risk Of U.S. Default

01 Feb 2009
Posted by Stan Collender

According to this Bloomberg story from last Friday, a just-completed Barclays survey shows that 40% of Japanese institutional investors now think there's an increased possibility that the United States will default on its debt.

I don't think there's any chance the United States will default on its debt, but the fact that such a large percentage of the buyers of our debt from our second largest  lender thinks so is not a good thing, especially as we're about to borrow much, much more.

As the article points out, this is already increasing our cost of borrowing as foreign demand for U.S. debt falls.

My guess is that this this is one of the reasons we keep hearing the White House talk about a long-term get-our-budget-in-order strategy.

Here's the full story.

Barclays Says 40% of Japan’s Investors See Risk of U.S. Default

By Theresa Barraclough and Shigeki Nozawa

Jan. 30 (Bloomberg) -- Forty percent of Japanese investors said there is a risk that the U.S. government will default on its debt, a survey published by Barclays Capital showed.

Almost 34 percent of the 66 respondents in the poll sent to Japanese institutional investors from Jan. 26 to Jan. 28 said there is a “significant” or “slight” risk that the U.S. will lose its AAA sovereign debt rating this year. Twenty-two percent said they were concerned about the credit risk of German government bonds. China surpassed Japan in September to become the biggest foreign holder of U.S. Treasuries.

“Sovereign risk related to national debt has been a recent topic of discussion among market participants,” Lhamsuren Sharavdemberel, a Tokyo-based analyst at Barclays, wrote in the report published yesterday. She confirmed the details today.

The cost of protecting $10 million of U.S. five-year bonds from default has surged $53,000 to $60,000, near the highest since Bloomberg started tracking the data on Jan. 28, 2008. Investors are pricing in a larger risk premium as U.S. President Barack Obama seeks Senate approval for an $819 billion stimulus package aimed at lifting the economy out of recession.

There is a lot of “concern about an expanded budget deficit under the Obama administration,” Sharavdemberel wrote.

The yield on 10-year U.S. Treasuries surged 61 basis points this month, the largest jump since April 2004, on speculation investors may have trouble absorbing as much as $2.5 trillion in debt the U.S. is likely to issue this year to pay for a $1 trillion budget deficit and programs to spur the economy.

Foreign Demand Falls

International demand for long-term U.S. financial assets fell in November as foreign investors sold Treasury, agency and corporate debt, a government report showed on Jan. 16.

China remained the biggest foreign holder of U.S. Treasuries, after its holdings rose 4.4 percent to $681.9 billion. Japan, the second-largest holder, had holdings that were little changed, down 0.1 percent to $577.1 billion.

Treasuries have handed investors a loss of 2.96 percent this month through yesterday, according to indexes compiled by Merrill Lynch & Co. That’s the worst performance since a 3.15 percent loss in April 2004, the indexes show.

The U.S. government’s top AAA credit rating was affirmed by Standard & Poor’s on Jan. 13.

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