Bond Markets Shaken in Europe, Stirred in Japan

BOND STRATEGIST: Did you know Japan has more than JPY 1 quadrillion (yes, that's correct) of outstanding debt, representing about 200% of GDP?

Dave Sekera, CFA 11 April, 2013 | 9:02AM

European Economic Risks to the Downside, Yet Financials Trade to the Upside

It seems that the banking crisis in Cyprus has quickly become old news in investors' minds and the market appears to be discounting the potential for contagion and runs on weak banks in other peripheral eurozone nations. Credit spreads of European banks rebounded significantly from the prior week's Cyprus-induced sell-off.

Japan has more than JPY 1 quadrillion (yes, that's correct) of outstanding debt, representing about 200% of GDP.

While tightening credit spreads on the sovereign debt would typically indicate declining credit risk, economic metrics out of Europe continue to indicate that the eurozone's recession is deepening. In addition, at the European Central Bank press conference, chairman Mario Draghi made several bearish comments about the eurozone economy, in particular admitting that the economy faces several downside risks. Unemployment is running at a 12% rate and appears poised to rise further. The purchasing managers index for eurozone manufacturing fell to 46.8 (a reading below 50 indicates contraction). Based on economic indicators, most forecasters expect that the eurozone probably contracted in the first quarter, which would be its sixth consecutive quarterly contraction. As the economy weakens, we expect nonperforming bank loans will rise, further pressuring banks' creditworthiness.

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About Author

Dave Sekera, CFA  is a senior securities analyst with Morningstar.

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