Big mistake! Japan's large banks misjudged the timing of interest rate cuts in Europe and the United States and suffered losses rarely seen in history

Finance Associated Press

2024-06-20 08:56Published on the official account of Cailianshe under Shanghai Poster Industry Group

Finance Associated Press, June 19 (edited by Zhao Hao) On Tuesday (June 18), local time, a spokesman for Japan's Agriculture and Forestry Central Treasury (Norinchukin Bank) said that the bank plans to sell about 10 trillion yen (about 63 billion US dollars) of US and European sovereign bonds to stop the continued losses caused by misbets on interest rates.

The Agriculture and Forestry Central Treasury is one of Japan's major banks. The bank said the bond would make up nearly one-sixth of the bank's global portfolio, and the sale would be completed by the end of March next year. For now, the bank expects to report a net loss of 1.5 trillion yen for the current fiscal year, three times the previous estimate of 500 billion yen.

The spokesperson added that the final amount of the loss may change depending on the bank's sales volume and market conditions. Kazuto Oku, CEO of Nong Lin CICC, told the media, "We will reduce interest rate risk and diversify our investments in assets that bear corporate and personal credit risk." ”

At the end of last year, the market expected the Fed to start cutting interest rates in March this year, and cut rates five to six times in 2024. But now, the market's expectations have changed dramatically, to the possibility of a rate cut starting in September, and between one and two rate cuts throughout the year.

Nonglin CICC's bet that European and U.S. interest rates would not remain high for so long has clearly failed to materialize, leading to huge losses in its portfolio. Last month, the bank announced a plan to overhaul its portfolio, until yesterday it finally announced a "cut-and-take" stop-loss.

It is worth mentioning that the losses of Nonglin Zhongjin in investing in U.S. bonds far exceeded those during the financial crisis. Unlike other large Japanese listed banks such as Mitsubishi UFJ Financial Group, Nonglin CICC relies primarily on its portfolio of nearly 6 billion yen in securities to generate profits. Due to the negative interest rate environment in Japan, the bank has been investing overseas for a long time.

As of March, the bank's bond holdings of 31.3 trillion yen accounted for about 56 percent of its overall portfolio, according to documents released last month, and unrealized losses in this segment amounted to 2.19 trillion yen.

The bank is also a major investor in mortgage-backed bonds (CLOs), holding 7.4 trillion yen worth of securities.

Ed Al-Hussainy, an interest rate strategist at US asset manager Columbia Threadneedle Investments, said: "This seems to be just a failure of risk regulation for this bank. We are still seeing very aggressive buyers of US investment grade bonds, with Japanese buyers coming back after selling US Treasuries in 2022. ”

Bond traders are now betting on a surge in U.S. Treasuries and re-entering the bullish trade that fled ahead of last week's CPI data and the Fed decision, market participants recently said.

Momentum is also gaining momentum in the spot market, with a JPMorgan Chase & Co. survey showing the largest net long in about a month in the U.S. Treasury spot market.

(Finance Associated Press Zhao Hao)

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