Investors in the Treasury market will begin this week confronting the familiar specter of possible post-disaster selling of U.S. Treasurys by insurers, following the devastating earthquake in Japan on Friday.
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JIJI PRESS | APF | Getty Images An aerial view show the devastated Kesennuma city in Miyagi prefecture on March 12, 2011. |
In Japan, worries that insurance companies would need to sell Treasurys to raise cashmay give way to a flight to safety into U.S. government bonds if the threat of nuclear
meltdown persists.
Prime Minister Naoto Kan described the crisis as Japan's worst since 1945, as officials confirmed that three nuclear reactors were at risk of overheating, raising fears of an uncontrolled radiation leak.
"I would assume repatriation fears may prove the initial motivation, but should the flows not materialize we risk a grinding bid on nuclear accident flight-to-quality jitters as well as the ongoing turmoil in the Middle East," said Ian Lyngen, a senior government bond strategist at CRT Capital.
The U.S. Federal Open Market Committee will hold a one-day meeting on Tuesday that will be closely watched for signs that the Fed could start to dismantle its "extended period" language, a pledge to keep monetary policy loose for the foreseeable future.
And two U.S. economic data points will offer important indications of current inflation trends, while on Wednesday housing starts data will provide a look at one of the two sectors — housing and employment — that are said to be lagging in the economic recovery.
To start, though, traders will take stock of the latest news from Japan, where authorities were struggling to care for millions of people without power or water, three days after an earthquake and tsunami killed an estimated 10,000 people or more in the country's darkest hour since World War Two.
Still, short of a nuclear disaster, investors will inevitably return to the question of whether insurers will sell Treasury holdings to finance rebuilding.
If they do, some traders expect the government to act through the Bank of Japan to fight the rise in the yen, which could ultimately lead to more foreign buying of Treasurys.
"I think it is positive for Treasurys. The BOJ will not sell Treasurys. That would cause the yen to appreciate," said Thomas di Galoma, senior managing director at Guggenheim Securities in New York.
"The BOJ is more likely to buy Treasurys to drive the exchange value of the yen down to stimulate the economy and help exports."
Christian Cooper, head of U.S. dollar derivatives trading at Jefferies & Co in New York, said he expected any Japan-related sell-off to be limited.
"I believe we have reached a critical point where the disaster is so severe the BOJ will engineer liquidity mechanisms that will reduce the likelihood of forced selling in the Treasury market," Cooper said.
"They will need massive liquidity but won't be forced to sell assets to get it. If anything, I expect slight buying pressure as the market begins to add this to the growing list of items that could reduce growth: Middle East unrest and further periphery deterioration in Europe."
Christian Cooper, head of U.S. dollar derivatives trading at Jefferies & Co in New York, said he expected any Japan-related sell-off to be limited.
"I believe we have reached a critical point where the disaster is so severe the BOJ will engineer liquidity mechanisms that will reduce the likelihood of forced selling in the Treasury market," Cooper said.
"They will need massive liquidity but won't be forced to sell assets to get it. If anything, I expect slight buying pressure as the market begins to add this to the growing list of items that could reduce growth: Middle East unrest and further periphery deterioration in Europe."
Crude Oil Futures Edge Higher in New York as Saudi Troops Enter Bahrain
Crude oil futures edged higher in New York to end four days of declines on speculation unrest in the Middle East may escalate after Saudi Arabia sent its troops into Bahrain.
Oil erased losses as Saudi Arabia’s cabinet said the kingdom has responded to a Bahraini request for “support.” Prices were lower most of the day on speculation Japan’s demand may decline after the 8.9-magnitude earthquake devastated the third-largest economy.
“The situation in Bahrain appears to be escalating and people start to wonder that it could become a bigger issue,” said Carl Larry, president of Oil Outlooks & Opinions LLC in Houston.
Oil for April delivery gained 3 cents to settle at $101.19 a barrel on the New York Mercantile Exchange. Futures touched $98.47, the lowest intraday price since March 1. Crude is up 25 percent from a year ago.
Brent oil for April settlement slid 17 cents to $113.67 a barrel on the London-based ICE Futures Europe exchange.
Saudi troops entered its neighboring country as part of a regional force from the Gulf Cooperation Council, the first outside intervention since a wave of popular uprisings swept through parts of the Arab world.
Troops from the council have arrived in Bahrain to protect “vital installations in Bahrain and maintain stability and security,” said Jamal Fakhro, the first deputy chairman of the Bahrain Shura Council.
A military force from the United Arab Emirates will also take part, the state-run Emirates News Agency reported.
Peaceful Protests
The U.S. is urging Bahrain, home to the U.S. Navy’s Fifth Fleet, to allow non-violent protests and encouraging Gulf nations to use restraint, White House Press Secretary Jay Carney told reporters at the White House.
Fighting also continued in Libya, holder of Africa’s largest oil reserves, as forces loyal to Muammar Qaddafi repelled insurgents from the oil port of Brega, the fourth rebel-held city re-taken by the nation’s leader.
Crude futures have surged 11 percent since Jan. 14, when the president of Tunisia was ousted in the first of the unrest that has rocked the Middle East and North Africa, including Saudi Arabia’s neighbors Yemen, Oman and Bahrain. Prices touched a 29-month high of $106.95 a barrel in intraday trading March 7.
“Saudi Arabia is sending troops to Bahrain and that has to make everybody nervous,” said James Williams, an economist at WTRG Economics, an energy research firm in London,Arkansas. “There is tension all around Saudi Arabia and the Middle East. Oil is not going to continue its decline.”
Heating Oil
Oil also followed gains in heating oil as factories and utilities in Japan may buy diesel and fuel oil to replace the power output lost from nuclear plants, said Williams.
Heating oil for April delivery increased 3.48 cents, or 1.2 percent, to $3.0638 per gallon on the Nymex.
Prices tumbled earlier as the quake that hit the world’s third-largest economy on March 11 shut 29 percent of domestic refining capacity, according to Bloomberg calculations based on Petroleum Association of Japan data.
“You are taking demand from the third-largest economy out of the market and oil is responding negatively,” said Tom Bentz, a broker with BNP Paribas Commodity Futures in New York. “The short-term trend still looks to be lower. The next support area is somewhere around $96.”
More than 10,000 people in northern Japan may have been killed by the earthquake, which unleashed a 7-meter (23-foot) tsunami. Canon Inc., Sony Corp. and Nippon Steel Corp. have halted some manufacturing operations. Japan is the third-largest oil-consuming country after the U.S. and China.
Refineries Shut
JX-Nippon Oil & Energy Corp. closed refineries in Sendai, Kashima and Negishi in the country’s northeastern Tohoku region. The plants have combined processing capacity of about 600,000 barrels a day. Cosmo Oil Co. shut its 220,000-barrel Chiba facility following fires at liquefied petroleum gas storage tanks.
Kyokuto Petroleum Industries Ltd. has shuttered its 175,000-barrel-a-day facility in Ichihara, near Tokyo. TonenGeneral Sekiyu K.K. said March 11 that it halted the major units at its 335,000-barrel Kawasaki plant.
The closures have affected about 1.3 million barrels of the country’s total of 4.52 million barrels a day of capacity, based on data from the Petroleum Association of Japan.
“Japan is probably not consuming up to 4 million barrels a day and that’s going to pare some of the imports,” said Richard Ilczyszyn, a market strategist at Lind-Waldock, a broker in Chicago.
Japan Demand
Japan consumed 4.42 million barrels a day of oil in 2010, according to data from the International Energy Agency’s Feb. 10 Monthly Oil Market Report. China used 9.39 million barrels and the U.S. consumed 19.25 million, the agency said.
Large speculators and funds increased net-long positions, or wagers on higher prices, by 2 percent in the seven days ended March 8 to 311,632 futures and options, the most in records dating back to June 2006, according to the Commodity Futures Trading Commission’s weekly Commitments of Traders report. The total has jumped 68 percent since Feb. 15.
Oil volume in electronic trading on the Nymex was 497,148 contracts as of 3:09 p.m. in New York. Volume totaled 744,460 contracts on March 11, 7.2 percent below the average of the past three months. Open interest was 1.5 million contracts.
To contact the reporters on this story: Moming Zhou in New York at Mzhou29@bloomberg.net