The idea of the United States defaulting on its debt spooks investment strategists, but AllianceBernstein Chief Investment Officer Doug Peebles is already talking about how Japan’s Ministry of Finance might eventually restructure Japan’s sovereign debt.
Peebles sketched out a possible Japan sovereign debt restructuring strategy today in New York, at an insurance conference organized by S&P Global Ratings. The moderator of a panel discussion for chief investment officers asked for the panelists’ thoughts on non-U.S. investments.
In Japan, the ratio of national debt to gross domestic product is about 250%. That compares with a debt-to-GDP ratio of about 105% in the United States.
Peebles said Japan will eventually have to default on the debt, use inflation to wipe the value of the debt away, or somehow restructure the debt.
The Bank of Japan, Japan’s central bank, has been buying about 70% of all newly issued Japanese government bonds in recent years. Peebles said he thinks that’s a sign that Japan’s Ministry of Finance wants to find a way to restructure the debt.
If Japan had a significant number of large bond holders outside of Japan, restructuring the debt might be complicated, but, in this case, “they owe themselves the debt,” Peebles said.
When a country’s own residents hold most of the national debt, “it actually doesn’t have to burst,” but a high debt load will hold down economic growth, Peebles said.
One way Japan could restructure its debt would be to replace some or all of the bonds now outstanding with bonds designed to pay off over the course of 100 years, Peebles said.
Peebles’ company, which has about $500 billion in assets under management, is owned by AXA S.A., a large, Paris-based insurer. AllianceBernstein’s clients include insurers.
Peebles appeared on the S&P insurance conference chief investment officer along with Eric Kirsch, the chief investment officer at Aflac Inc., and Lisa Longino, health of U.S. global portfolio management for MetLife Inc.
During the chief investment officer session, the panelists also sized up different types of U.S. assets.
Hedge funds: All of the panelists said they are avoiding hedge funds, at least for now. They still like private equity investments.
Commercial real estate: The panelists seemed to be happy with the current state of their commercial real estate-related investments, in spite of press reports of problems with some shopping malls.
Longino, for example, said that, when MetLife invests in a mall, it usually invests in a mall that’s nicer than the malls that are running into serious problems.
Kirsch said that Aflac is issuing fewer commercial mortgage loans, because the deals available now look too rich. Instead, Kirsch said, Aflac is issuing loans to investment-grade companies that need temporary financing for real estate-related deals, such as projects to buy and renovate hotels.
Bonds from companies with low credit ratings: The panelists said they like the current yields on bonds from companies with low ratings but are nervous about how easy the bonds will be to sell in the future, given that many broker-dealers are trying to cut down on their holdings of high-yield bonds.
Kirsch predicted that lack of liquidity will do more to hurt the prices of high-yield bonds than borrowers’ loan payment problems will.
Longino agreed on the need to watch the resale market for high-yield bonds carefully.
“Liquidity exists till it doesn’t,” Longino said.
Potential disruptors: Longino said one possible challenge to insurers that could “come out of nowhere” might be self-driving cars. If use of self-driving cars takes off, that could have unexpected effects, such as a decline in the value of parking lots, Longino said.
— Read Are ‘Safe Haven’ Assets Safe Anymore? on ThinkAdvisor.