Bonds to stay on a high

TOKYO MARKET: Nikkei

JAPANESE bonds are likely to stay near record highs this week, and stocks to enjoy mixed fortunes, as investors remain sceptical over the government's progress in shoring up the rickety financial system.

The ruling Liberal Democratic Party wants to pass bills aimed at preventing the collapse of troubled banks by early September. Opposition parties are stalling the passage of these bills, creating concern that could lead to a rise in short-term interest rates. That would hurt bonds, because it raises funding costs for banks and other investors, analysts said.

"The big question is whether the LDP and the opposition can compromise on the bills aimed at stabilising the financial sector," said Michael Lockrow, a senior economist at Thomson Global Markets. "Until the bills are passed, it's hard for banks to make a move."

Last week, the yield on the benchmark government stock rose by half a basis point to 1.18 percent.

Government bills currently before parliament would close insolvent banks and speed up the disposal of 77trn in bad and risky loans held by banks. They would also enable the government to take over management of insolvent banks and create bridge banks to provide funding for sound borrowers.

On Tuesday, investors expect the Ministry of Finance to auction about 1.1trn ($7.7bn) of 10-year government bonds with a record-low coupon of 1.5 per cent. Any rise in bonds may be limited before an auction of 10-year government bonds on Tuesday.

Companies are likely to rush to sell bonds to raise funds before their half-year book-closing at the end of September, underwriters said. With yields so low, demand for high-quality corporate bonds will probably be firm, said Michiya Seki, a trader at New Japan Securities.

On the stock market, progress toward a merger between troubled lender Long-Term Credit Bank of Japan and Sumitomo Trust and Banking could spur buying of bank shares. Finance Minister Kiichi Miyazawa praised a plan to reorganise LTCB in preparation for its merger with Sumitomo Trust.

The benchmark Nikkei 225 Stock Average gained 1.15 per cent last week, to 15,298.93. It will probably trade between 15,000 and 16,000 in the coming week, said Ichizo Yamauchi, research director at Kokusai Asset Management.

UP

Prudential Corp Plc

17 Aug - 21 Aug '98

Shares in the Prudential, Britain's largest life insurer, rose 11 per cent. The company is said to have threatened to fire one-third of its 4,000 sales staff if they do not meet new targets after a sales force review. Staff have to generate a minimum of pounds 56,000 of business each year. Senior managers said that the sales department, accused of malpractice and of breaching the Financial Services Act, has just two or three years to prove its worth. Brokers are also recommending the stock after an $18bn offer by US insurer AIG Group for Sun America on Thursday. This valuation shows the Pru's US annuity subsidiary, Jackson National, could be worth as much as 400 pence a share.

DOWN

Reed Intl Plc

17 Aug - 21 Aug '98

REED INTERNATIONAL shares suffered one of the biggest declines in the stock market last week, falling nearly 12 per cent.

The company, one of the world's largest publishers, was hurt after a leading broker published a report in which it advised selling the shares. It estimates the company has above-average exposure to the advertising industry and compound earnings growth over the years 1997 to 2000 will only be 5 per cent.

There are increasing pricing and competitive pressures within the franchise business. This leaves the stock looking expensive and the price could drop to 440 pence.