We have recently explained (here and here) just how dismal the outlook for France is. The gaping divide between French and German perspectives on austerity, growth, and policy is widening by the day. And yet French credit spreads (and yields) have been collapsing ever tighter at the behest of a world gone mad on monetary munificence. We know who the greater fool is in Spain and Italy (the domestic banks and pension funds); and so now, thanks to SocGen, we know who the greater fool is in French debt (OATs).
The BoP data also show that Japanese institutions have been sellers of USTs every month from January to March; and buyers of European debt since Dec 11…
and France has been by far the largest recipient of Japanese debt purchases. In March alone flows into OATs rose to JPY232bn, a 3-month high. Institutions have been buying OATs for 16 months in a row for a cumulative JPY5.7trn (E43.8bn) since December 2011.
A marked 31bp decline in 10y OAT yields in April indicates that Japanese investors stepped up their purchases last month.
This will not end well…
Outflows from Japan could be curtailed in the future unless JGB yields and volatility settle down. 10y JGB yields touched a 0.70% high on Friday and spiked again overnight, to 0.80%, the highest since February. If this continues, Japanese institutions may become more reluctant to move funds overseas. This would slow and potentially cap the descent of the JPY, but also implies that the low point for eurozone peripheral funding costs would be behind us. With the ECB (and Fed) indirectly benefiting from aggressive BoJ easing, it is perhaps no wonder that G7 officials voiced their tacit approval at the weekend of Japan’s stimulus tactics.