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JPY Swap market    (latest update 08.08.2009)

In Japan the JGB market and the swap market have their own directions. Main reason for a divergence is that the cash market on JGB differs from the swap markets. Participants for JGB settlement and biding are mostly domestic players, who keept the JGB bonds in their books (like insurance companies). Swaps are more liquide and traded in all three time zones, but having a strong foothold in London. Nevertheless the Japanese market dominates. This does include Singapore and Hongkong where swaps are traded in significant amounts.

In the past Lehman was one of the big foreign players in the domestic Japanse market and it can be seen in the spreads between swaps and JGB's in October 2008 that the curvers completely diverged. Since the second quarter of 2009 the markets are coming back and the spread between swaps and JGB's start to shrinking. In the last few weeks means July/August the situation is turning to pre-Lehman world. The swap rates tend to be higher than the JGB rates. Still not exactly the level they had before the shock, but consistently positive. It is important to notice those spreads in case a JGB portfolio needs to be hedged. Even with the same AA-rating of swaps and JGB's the hedge has to face ineffectiveness from diverging yield levels.

The same challenge holds for futures. Their movements do not necessarily reflect the yield movement of the JGB's. Liquidity and settlement issues are the driving forces. In case some of the readers wants to comment on those phenomena the author would be thankful.

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