Stocks Rise as Bonds Fall on Hopes of AIG Rescue

Wednesday saw the Japanese government bonds tumbling as stocks in Tokyo went up by 2 percent leaning on the hopes that the American International Group will be rescued by the Federal Reserve.

Yields of US Treasuries also went up earlier.  The two-year note posted an increase to 1.93 from the previous 1.79 percent posted on New York last Tuesday.

Bailout Plan for AIG Welcomed by Stock Markets

News went out that the US Federal Reserve will extend an $85 billion bail out money for AIG and will take 80 percent of the stakes in the beleaguered company.  This development, which was leaked by a source briefed on the matter, quashed investors’ appetite for safe haven areas.

The futures decline on the other hand was due to their sharp gains in the past week making them more expensive than the cash bonds.  Short selling of cash Japanese government bonds was also limited as uncertainties on the US financial system still hangs over the head of investors.

Tatsuo Ichikawa of RBS Securities based in Tokyo said selling is generally limited showing that market players are still not fully sold out on the news about the impending US Fed rescue of AIG.  The sentiment led investors to avoid a one-way bet.

Bonds Suffer

A 0.90 point decline hit the 10-year JGB futures registering at 138.55.  The JGB soared by 3 full percentage points on Tuesday as investors panicked after the collapse of Lehman triggering an exodus to safe haven government bonds.

Midday saw the Nikkei stock exchange gaining by 2 percent but slowed down as the day ends posting and advance of 1.2 percent.

The JGB yield went up by a full 2 basis points to post a 1.485 percent gain.  The increase was a significant move away from its five-month low of 1.375 percent suffered on Tuesday’s sessions.

Traders said the futures’ selling is just natural owing to the hopes that AIG will be rescued.  The good news will push the stocks higher but it will pull down the Treasuries.

The futures led the selling frenzy though their prices are quite expensive.  On the other hand, cash bonds are primarily supported by the growing concerns on the state of international credit market plus the worsening global economies.

The American International Group is the latest victim hit by the lingering mortgage and credit crisis.  Lehman filed for bankruptcy earlier as Merrill Lynch is set to be acquired by the Bank of America anytime this week as deals on its sale have been finalized.  

The JBG auction set on Tuesday was shrouded in doubt as Lehman was one of the top bidders for the 20-year bonds.  The absence of a key bidder could lead securities firms to become more cautious which could push yields of longer dated bonds.