By Saburo Funabiki Jan. 28 (Bloomberg) -- Japan’s long-term swap rates are rising as traders bet the nation’s fiscal position will deteriorate under the government of Prime Minister Yukio Hatoyama, JPMorgan Securities Japan Co. said. Ten-year swap rates for settlement a decade from now rose this month to 3.15 percent, the highest level since May, according to data compiled by Bloomberg. Swap trades have increased since the Democratic Party of Japan ousted the Liberal Democratic Party last year, said Reiko Tokukatsu, a senior bond strategist at JPMorgan Securities in Tokyo. “Investors are mainly engaged in swap trades, expecting that Japan’s fiscal premium will push up long-term interest rates,” Tokukatsu said. Standard & Poor’s on Jan. 26 lowered the outlook on Japan’s AA credit rating to “negative” because of diminishing “flexibility” to cope with the world’s largest public debt and concern about the lack of a plan to rein in budget deficits. Japan’s national debt may reach 973 trillion yen ($10.8 trillion) in the fiscal year ending March 2011, according to documents on the Finance Ministry’s Web site. In an interest-rate swap, two parties agree to exchange payments over a period of time, with one agreeing to pay a fixed rate while the other pays a rate that fluctuates with a benchmark index or formula defined in the contract. Default Swaps Some investors are trading options that would profit if Japan defaulted on its debt, said Stefan Liiceanu, a Tokyo- based senior fixed-income at Barclays Capital Inc. Credit-default swaps on Japanese government bonds were at 88 basis points as of 8:45 a.m. in Tokyo, near the highest level since April, according to CMA DataVision. The contracts were quoted at 70 basis points at the start of this year. Credit-default swap indexes are benchmarks for protecting bonds against default and traders use them to speculate on credit quality. An increase suggests deteriorating perceptions of creditworthiness and a drop shows improvement. A basis point on a swap hedging $10 million of debt from default is equivalent to $1,000 a year. To contact the reporter on this story: Saburo Funabiki in Tokyo at sfunabiki@bloomberg.net.

Source