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The Hedge Fund Trader’s’s Holy Grail
The collapse of the Japanese government bond market has long been the holy grail of the hedge fund community. Unfortunately, it has remained just that for nearly 20 years, much talked about, unattainable, and some would say imaginary.
During the early eighties, I took the entire pension fund of the Foreign Correspondents’ Club of Japan out of US dollar bonds and put it into JGB’s, then yielding 10%, catching a decade long plunge in yields, and earning the eternal gratitude of the staff there. Even today, I am showered with free drinks and lunches when I visit Tokyo. After the 1990 stock market crash, JGB’s rocketed on a flight to safety bid, and the ten year eventually reached an unimaginable yield of only 0.46%.
For the last several years, we have traded in a 1.20% to 1.90% range. Every wave of government stimulus spending brought hopes of an imminent collapse in bond prices and rocketing yields. But with Japan about to enter its third “lost decade,” the Japanese government has delivered a seemingly limitless ability to disappoint, with one failed economic policy following another. The country’s gun shy institutional investors never bought it, and the end result was a soaring national debt, a moribund economy, and 1,000 bridges to nowhere. Just one of these, the Seto Ohashi Bridge connecting Honshu with Shikoku, is 8 miles long, cost $7 billion, and, well, goes to nowhere. Hedge fund guru, Julian Robertson, annually wrote a nine figure check to the JGB market for years, anticipating a rate spike which never appeared.
However, the day of reckoning for the JGB market may at last be coming. The savings rate has dropped from 20% during my time there, to a spendthrift 3%, because real falling standards of living leave a lot less money for the piggy bank. The national debt has rocketed to 200% of GDP, and 100% when you net out government agencies buying each other’s securities. Japan has the world’s worst demographic outlook. Unfunded pension liabilities are exploding. Other than great cars and video games, what does Japan really have to offer the world these days but a carry currency? That's not much to support a population of 130 million, a third of whom are about to enter retirement. I’m not saying Armageddon is tomorrow. But the big hedge funds, like David Einhorn’s Greenlight Capital, are already starting to dog pile in. And if JGB’s do go down the crapper, can the yen be far behind?
Unfortunately, there is no easy way for retail investors to get involved here. There isn’t JGB ETF, or its mirror image short, although there will be soon. Institutional investors can short through futures markets in Osaka and Singapore, or go through the more tedious process of borrowing paper and selling it in the open market. Shorting the Japanese currency, though, is a piece of cake; with the ultra short yen ETF (YCS) offering a leveraged 200% bet that the yen will plunge.
For more iconoclastic and out of consensus analysis, please visit me at www.madhedgefundtrader.com .
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USDJPY daily trend has been bullish for a while.
USDJPY weekly trend has just turned bullish.
http://www.zerohedge.com/forum/market-outlook-0
Another stupid gaijiin article. 1. JGB yields went as high as 2% just 2yrs ago. 2. Nobody made money selling JGB. never ever 3. 95% of JGB own by Japanese and with reserve of 1trln they just borrow from they just borrow from themself. 4. With Core CPI -2.2% YoY, real yield of JGB is higher then UST. and on and on and on.. And don't forget Soros, he also lost fortune short JGB, some people just never learn.
All a question of stock of savings... I think if Japan needed money, the countries that benefited from the last 20years of carry better watch out. Any sort of bond sell off in Japan will lead to a massive move of accumulated savings back into Japan.
In view of the magnitude of federal debt to be issued during calendar 2010, the proposed regulation may well be intended to "encourage" those with excess liquidity to engage in direct purchases of federal debt rather than depositing the same in money market funds.
Ironically, such an incentive may well serve to trigger a suspension of redemptions from money market funds, which undoubtedly would eliminate any remaining confidence in the US financial markets, if any.
This is a reply to Bruce's post.
That is exactly what I think they are going to do. If the Japanese can't fund at 1%, why not sell their boatload of (soon to be) worthless US treasuries.
This would be an epic disaster for the US and would force Ben to choose between collapse and massive inflation.
-Elvis
"Hedge fund guru, Julian Robertson, annually wrote a nine figure check to the JGB market for years, anticipating a rate spike which never appeared. However, the day of reckoning for the JGB market may at last be coming. "
Doing the same thing over and over hoping for a different result is called insanity. But of course, this time could be different, as the Goldman squid would have you believe. But that is investing based on "Obamaesque hope". The rest of the article regurgitates an article on Japan in The Economist wrtitten 10 year ago, and resurfacing every 6 months or so for the last decade to make up the 100 off pages they need to sell. The fact is, for the first time, hedgies have nothing more to short. Either they have surrendered to the Fed and CBs worldwide, or bought into Goldman's next brilliant idea to suck them all in.
Another excellent post for today.
"...third lost decade..."
oh man - head in hands.
3 in a row, now we're talking about a trend
great point rapier !! haha
They make great motorcycles too. Their ability to design and manufacture superior products is unmatched in the world. Such isn't enough obviously. We will never know but that would have existed even if the banks had been allowed to fail and then perhaps it would be enough. When you consider that the US excells only is the manufacture of financial assets the saving of the banks makes a lot more sense.
But what good is a car that will last for 300k miles when people want to get a new car every few years?
People don't want quality. They want cheap, disposable goods. It's why China and Walmart are the shit, and Japan and the U.S. aren't viable anymore.
Do you want a TV that's going to last 20 years? Of course not. There will be a better TV in three years.
While quality goods seem to be desirable on their face, we live in an incredibly wasteful (global) society that values things that are new, instead of things that last.
While this might hold for american stuff, because the american labor force is lazy and decadent the Nazi, I mean Germans, have been doing pretty well for themselves. If it werent for the degenerate Southern European members of the EU, the Fourth Reich would look strong and powrful.
Japan makes really good bearings too.
and hi-fi systems!
I think I see RT's points. Both of them.
+2
Japanese stocks have been in a bear market for 20 years.
Ergo, bonds have been the preferred place to hide for 20 years.
I see no reason for things to change unless the Nikkei explodes up on a huge sign of strength, signalling a major trend change in stocks.
I'm afraid that everyone bandwagoning on this "short bonds" trade is going to be disappointed once again.
In fact, wouldn't surprise me to see the market do the exact opposite, just to clear out a lopsided trade. Goldman will surely profit from it.
The real question of course is, "Does a woman's beauty exceed all other values?"
@Robo
That's an "asian girl"? Could have fooled me. Maybe need a closer look...
I call BS...
Japan's inflation last decade is less than zero. Japan's external debt is the lowest in the developed world. Japan has a trade surplus. If the JPY is going to fall, how is that going to occur? Japanese capital flight?
I suggest that you look at who has money. If Japan needs money, it will flow into Japan, not out! In the extreme case, Japan can institute capital controls. In a world full of problems, you seem to be looking in the wrong place.
Total JGBs outstanding: JPY 694300bn.
http://www.mof.go.jp/english/jgb-e.htm
FY2010 budget:
est. revenues (tax+other): JPY 47996bn.
JGB issuance: JPY 44303bn.
http://www.mof.go.jp/english/budget/e20091225a.pdf
Debt (incl 2010 issuance) = 15.4 times revenue.
Yeah. No worries.
now go and figure out how much per year MOF and BOJ and Ucho and Kampo and Nampoku buy, and get your math in order... They sell JGB to themself.
Let's put it this way. You give me a choice of hands including the US, UK, etc., I will take the Japan hand.
The US hand - Over $13T in external debt, $500B trade deficit; $150-200B per month budget deficit, sky-high aggregate debt to GDP. Sure, let's go short JGBs.
I think we agree here. JG is toast, but most likely has the ability to kick the can further down the road than the other dogs. E.g. have JCB print & sterilize by offloading FC resvs as necessary (as Bruce suggests if I understood correctly).
Toast...maybe, maybe not. Kick the can further...definitely. They owe the money to themselves. Why go through the torment of default or devaluation. They may devalue if we see mass devaluations.
Good analysis. Thanks.
There is something about this that troubles me. Say it starts to play out as you describe. That Japan can no longer fund its deficit with 1% money. That the currency is no longer a safe haven go to. What might they do if that is the future?
My concern is that they would start to fund the debt with their own FC reserves. They have a bundle. The new government has indicated it would use the "rainy day" funds that it holds.
If the Japanese even slowed down their purchases of Tbonds (much less sell any) our bond market would tank.
Anything to that in your view?