When we discussed the specifics of the ongoing European bank run, we cited from the NYT which noted the actions of a core Japanese mutual fund with European sovereign exposure, namely that "earlier this month, Kokusai Asset Management in Japan unloaded nearly $1 billion in Italian debt." The Nikkei has just reported that this was merely the beginning: "Kokusai Asset Management Co. has sold all Spanish and Belgian government bonds that were part of its flagship fund, Global Sovereign Open, The Nikkei learned Monday. As of Nov. 10, Spanish and Belgian bonds accounted for 1.8% and 3.1% of the fund, respectively. The share of the bonds in the fund's portfolio fell to zero as of Thursday." Just what prompted this drastic move and very loud slap in the face of the European confidence building exercise? "A Kokusai Asset Management official said the company sold off the bonds, amid widespread concerns about the outlook for Europe's sovereign debt crisis to avoid hurting the value of the fund, given volatile prices of the bonds. The mutual fund operator had already divested the fund of all its French government bonds in October and all Italian bonds in early November." It is safe to say that where one core asset managers has been (and no longer is), everyone else will shortly follow. For the simple reason that it is now if not cool to not have European exposure, it is certainly required by one's LPs to cut down on all European bonds. Kokusai is merely the canary: expect everyone else to go ahead and dump the €741 billion in non-domestically held Italian (and then all other European sovereigns) bonds. Good luck ECB buying these in the secondary market. And one market where the ECB can do nothing by charter, is the primary issuance one, where as the following update from Morgan Stanley shows, things are getting from from bad to worse.
Issuance between now and year-end
A near-term silver lining for many countries is that their 2011 bond issuance programmes are drawing to a close in many cases (see Exhibit 4). France, Netherlands and Portugal have all completed their bond issuance programmes. However, Germany, Italy and Spain still have a fair way to go. In 2012, of course, bond issuance will have to resume.
In the meantime, there is still quite a lot of T- bill and bond supply coming up before year-end (Exhibit 5). The week of the 28 November will be a heavy upply week; with issuance from Belgium, Italy, France and Spain. If the pattern of worsening auctions persisted, it would be very bad news for euro area sovereigns, in our view.
And if, IF, Europe somehow finds a buyer for all of this stuff even as all other prudent asset managers are mimicking the Tesoro and selling on their own...then we get 2012, where things go from bad to worse to truly surreal - sorry Jim O'Neill, but in this case your astonishment would be perfectly valid.