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Hornbach, Matthew (FID)
Subject: MS US RATES: Why Do They Buy? Note: The view expressed is my own view. This is not a product of Morgan Stanley's Research Department and you should not regard this as a research report. Just a short piece to distract you from the random number generator that has a 90% chance of being within +/- 100,000 jobs of the actual number (according to the BLS). In other words, if the nonfarm payrolls report matches the Bloomberg consensus of +90k for the change in private payrolls today, the BLS cannot say with 90% confidence that the economy actually added private jobs. Food for thought. Anyway, read the Wall Street Journal article at the bottom of this piece. Here is one of the opening lines: Vehicles made in Japan at an exchange rate of 85 yen to the dollar "are not economically feasible," Yoichi Hojo told reporters Thursday. "It's just impossible for [the yen] to stay at these levels in the long term." Mr. Hojo is the chief financial officer at Honda Motor Co. So, it seems that Japan faces yet another uphill battle that is common in the U.S. - selling cars profitably. I bring to your attention this article, and hence the level of USDJPY, because the currency and short-end interest rate differential between the U.S. and Japan has played (and is playing) a large roll in the activities of "real money" investors in Japan. Exhibit 1 says it best. Whereas USD-based investors look at Treasury yields and cringe, JPY-based investors look at Treasury yields with big grins. You don't need me to remind you that 2.91% 10-year Treasury yields are near the all-time lows for USD-based investors. However, the 1-year FX-hedged 10year Treasury yield of 2.63% is 140 bp above the average hedged-yield since June 1997. It is also 158 bp higher than the yield on 10-year JGBs. "Juicy" doesn't begin to describe the opportunity. Exhibit 1: Looking At The Same Thing Through Different Lenses - 10-Year Treasury Yields
Bloomberg * Assumes JPY-based investor hedges FX-exposure via 1-year forwards Exhibit 2 graphs the history of this "hedge cost" which we calculate using 1-year interest rate swap rates and the 1-year cross currency basis swap.A Measly 28 bp Per Annum! .Page 2 of 6 Source: Morgan Stanley MUFG Research. You can see that the cost to buying USD assets and hedging them back into JPY is extremely cheap compared to history. Exhibit 2: Hedge Cost to a JPY-Based Investor .
Despite the 30% depreciation on the USD relative to the JPY over the past several years. Exhibit 3: USDJPY Foreign Exchange Rate History . any new purchases of USD bonds left unhedged have the potential for much more upside if this USDJPY depreciation trend reverses. This is where the value of the USDJPY foreign exchange rate really comes into play.Page 3 of 6 * Assumes JPY-based investor hedges FX-exposure via 1-year forwards Source: Morgan Stanley MUFG Research. it is worth noting that not all "real money" JPY-based investors hedge their foreign currency bond holdings back into JPY. Hojo at Honda Motors isn't the only person who believes it will. Bloomberg Finally. And believe me when I say. Mr.
" Yoichi Hojo told reporters Thursday.'s chief financial officer said the yen's strength is damaging Japan's export-driven economy but predicted the situation won't last. that was well below the 90 yen mark that Japanese car makers were expecting several months ago when they forecast earnings for the current fiscal year. While the greenback rebounded to around 86 yen Thursday. 10:29 A. . Hojo's comments came a day after the dollar hit an eight-month low of 85." Mr. Vehicles made in Japan at an exchange rate of 85 yen to the dollar "are not economically feasible. ET Honda Predicts Yen Will Weaken By YOSHIO TAKAHASHI TOKYO—Honda Motor Co.Page 4 of 6 Source: Morgan Stanley MUFG. Bloomberg AUTOS AUGUST 5. which began in April. 2010.32 yen. "It's just impossible for [the yen] to stay at these levels in the long term.M.
has made dollar forward contracts at 90 yen that will cover 90% of of the auto maker's currency exposure for the current quarter. At Honda. . Executive Director Morgan Stanley MUFG Securities Co. He said labor costs in China account for only 2% of overall production costs. the auto maker didn't raise its outlook partly because of concern the dollar could fall further.56 billion yen a year earlier. Hojo said Honda expects no major impact on its earnings from increased labor costs in China.16 billion) from 7. he said. Nissan Motor Co. | Fixed Income Yebisu Garden Place Tower | 4-20-3 Ebisu. Shibuya-ku Tokyo.49 billion yen ($3. compared with about 20% in developed counties. we'd like to make [such contracts]. For the year through March.Hornbach@morganstanleymufg. Honda can increase imports of auto parts for production in Japan to take advantage of the yen' strength. Mr. saying it weakens exports and could hurt Japan's economic recovery. the car maker raised its profit forecast to 455 billion yen from its previous forecast of 340 billion yen. PLEASE CONSIDER OUR ENVIRONMENT BEFORE PRINTING THIS E-MAIL. "For the third quarter. behind Toyota. But it is hard with [the dollar's] current levels. down from its previous assumption of 90 yen. rising North American sales of large vehicles with relatively high profit margins. Matthew Hornbach. last month urged Tokyo to address the yen's strength. as well as growing motorcycle and car sales in emerging markets can offset the impact of slumping domestic production. Hojo said.. following strikes by workers at parts suppliers demanding wage increases. 150-6008 Phone: +81 3 5424-7564 Matthew. Despite the yen's strength. thanks to brisk sales in Asia and North America. who is the chairman of the Japan Auto Manufacturers Association trade group.Page 5 of 6 A strong yen deflates profits from overseas when translated back into the yen and makes products made in Japan more expensive. Net profit jumped to 272. the companies expressed concern over the yen's strength. As Japan's major auto makers reported quarterly results over the past week. Hojo said the only step the company can take in the short term is to purchase currency forward contracts. Japan's second-biggest car maker by volume.com BE CARBON CONSCIOUS. said last week that even though its first-quarter profit amounted to 71% of the company's forecast for the full fiscal year. abroad. he said. and potentially less competitive. Mr. Mr. but this is a long-term solution. Toyota Motor Corp. Ltd. essentially bets on the yen's strength. on Thursday boosted its full-year forecast but predicted earnings won't be as robust in the second half. even though it expects the dollar to average 87 yen for the rest of the fiscal year. Shiga." he said. Honda last Friday reported record earnings for the April-June quarter. Nissan Chief Operating Officer Toshiyuki Shiga on Wednesday said the dollar's weakness against the yen will hurt his company's exports. partly because the dollar could fall against the yen. Mr.
for the purpose of avoiding penalties that may be imposed on the taxpayer under U. commodity or other financial instrument or to participate in any trading strategy. Please see additional important information and qualifications at the end of this material. This is not a research report and was not prepared by the Morgan Stanley MUFG research department. and it cannot be used by any taxpayer. Each taxpayer should seek advice based on the taxpayer’s particular circumstances from an independent tax advisor. federal tax laws. It was prepared by Morgan Stanley MUFG sales. This material was not intended or written to be used.S. trading.Page 6 of 6 This material has been prepared for information purposes to support the promotion or marketing of the transaction or matters addressed herein. banking or other non-research personnel. Past performance is not necessarily a guide to future performance. . It is not a solicitation of any offer to buy or sell any security.
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