Japan sells 20 yr paper/ECB/Bahrain

Anticipating what lies ahead for Japan in funding a rebuilding over the next few yrs with the backdrop of an already highly indebted balance sheet, investors demanded the highest yield since Mar ’10 in buying a 20 yr bond auctioned off today in Japan. The bid to cover was solid at 4.13 vs 2.64 in Feb but the yield of 2.13% compares with 2.05% last month. Hours after the auction, Fitch said there was “no immediate impact on Japan’s ratings from the earthquake” and their “ongoing ability to fund itself in local markets at low yields is a crucial support for the ratings at their current levels and so far, there has been limited impact on sovereign funding conditions.” This self funding mechanism that Japan has blissfully had in the past will of course be highly scrutinized going forward. Asian stocks did bounce led by Japan and copper rose to a 1 week high in response, now back above the pre earthquake level on rebuilding bets.

We heard from the FOMC yesterday and as expected they will continue on their current course but the question that the Japanese disaster has brought to the ECB and BoE is more difficult to answer. One clue that maybe the ECB won’t go ahead with a rate hike that has been well telegraphed by Trichet and other members was a comment from ECB member Noyer to a German newspaper where he said “we will, as always, consider all new information, and that will be part of our global assessment.” This and a Moody’s downgrade of Portugal has the euro lower after its big rally off its lows vs the US$ yesterday. The Moody’s downgrade just has its new rating in line with S&P so thus provides very little new information. In the Middle East, Bahrain halted trading in its stock market due to rising unrest and Libya continues to bomb itself. Oil is bouncing in response.

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