Graphic was created on Bloomberg and depicts Japan and US 5-year credit
default swap indicative pricing. Japan’s 5-year CDS is
denominated in dollars and is represented by the white line. The US CDS
is the white line and is priced in euros.
As can be seen by looking closely at the recent performance, the US CDS
has risen through Japan’s. This does
not appear to have happened since throes of the Great Financial
Crisis.
Some observers want to blame the unorthodox policies of the Trump Administration, but this does not
seem right. For the first eight months of last year, the 5-year US
CDS traded between 18 bp and about 24 bp. It appears to have jumped to a
new and higher range in early August when
it rose to almost 32 bp. Since then, it has been mostly in a 25-30 bp
range. It finished last week near 27.2 bp, which is smack on the 50- and
100-day moving averages.
There was a spike to 30 bp following the unexpected results of the US
election last November, but it has been trading steadily mostly in a two basis
point range for last two months, despite the press conferences, executive
orders, and tweets. The US is one of ten countries where
the five-year CDS is quoted below 30
bp. It is difficult to call it rich. Norway looks the lowest near
20 bp. Keep in mind too that these are indicative prices and the liquidity appears uneven at
best.
Japan’s 5-year CDS rose from less than 20 bp in early 2008 to around 155
bp in late 2011 and early 2012. It has been trending lower since, and
the low reached at the end of last week (~25 bp) is the lowest since
2008. Some have suggested that the explanation lies with the Japanese
investors. They were net sellers of foreign bonds in December and
January. It is the first two-month divestment since March-April
2014.
It is not immediately clear why the sales of global bonds would spur a
decline in Japan’s CDS. Moreover, in the December-January period,
Japanese yields have risen. Consider that the 10-year JGB yield
closed last July near minus 22 bp. At the end of November, it was near minus five basis points.
It finished 2016 just below four basis points, the first month close in
positive territory in eight months. It was near 4.5 bp at the end of
January and is now near nine
bp. Year-to-date the US 10-year yield is off three basis
points, while the yield on the 10-year JGB is up nearly six basis
points.
We do not attribute great significance to the minor crossover of the
indicative pricing of the US and Japanese credit default swaps. To
the extent that there is a meaningful takeaway, it would seem to be the
convergence at relatively low levels–not quite pre-crisis levels, but near the
lowest since then. The US 5-year CDS has increased by less than a
single basis point this year, and Japan’s
has fallen by five. We suspect there is nothing nefarious taking place,
though we will continue to monitor the situation.