This page has been archived and commenting is disabled.
Why the JGB Market May Be Ready to Collapse
When I first arrived in Japan in 1974, international investors widely expected the country to collapse, a casualty of the overnight quadrupling of oil prices to $12 and the global recession that followed. Japanese borrowers were only able to tap foreign debt markets by paying a 200 basis point premium to the market, a condition that came to be known as “Japan Rates.”
Hedge fund manager, Kyle Bass, says that the despised Japan rates are about to return. There is nothing less than one quadrillion yen of public debt in Japan today. A perennial trade surplus powered high corporate and personal savings rates during the eighties and nineties, allowing these agencies to sell their debt entirely to domestic, mostly captive investors Those days are coming to a close. The problem is that the working age population peaked in Japan last year, and the country is entering a long demographic nightmare (see population pyramids below).
This year, the Ministry of Finance will see ¥40 trillion in receivables, the same figure seen in 1985, against ¥97 trillion in spending. Interest expense, debt service, and social security spending alone exceed receivables. The tipping point is close, and when it hits, Japan will have to borrow from abroad in size. Foreign investors all too aware of this distressed income statement will almost certainly demand big risk premiums, possibly several hundred basis points. That’s when the sushi hits the fan.
To top it all, no one in living memory in Japan has ever lost money in the JGB market, so expectations are unsustainably high. Need I mention that Japan’s Q2 GDP growth came in at an arthritic 0.1 %, not exactly a performance to run up the flagpole?
Both the JGB market and the yen can only collapse in the face of these developments. I know that the short JGB trade has killed off more hedge fund managers than all the irate former investors and divorce lawyers in the world combined. Read about my own recent, futile attempt to sell these markets by clicking here at http://www.madhedgefundtrader.com/august-6-2010.html .
But what Kyle says makes too much sense, and the day of reckoning for this long despised financial instrument may be upon us. How much downside risk can there be in shorting a ten year coupon of under 1%. I have included a breakdown of Kyle’s portfolio below, which you should note, has absolutely no equities anywhere in the world. Is Kyle trying to show us the writing on the wall?
To see the data, charts, and graphs that support this research piece, as well as more iconoclastic and out-of-consensus analysis, please visit me at www.madhedgefundtrader.com . There, you will find the conventional wisdom mercilessly flailed and tortured daily, and my last two years of research reports available for free. You can also listen to me on Hedge Fund Radio by clicking on “This Week on Hedge Fund Radio” in the upper right corner of my home page.
»
- advertisements -
MHFT, you did not quite capture Kyle Bass's full argument. In the CNBC videos that TD posted with Farber ( http://www.zerohedge.com/article/must-watch-kyle-bass-interview-there-no-way-i-can-be-long-stocks ), Bass described the demographic problems with Japan and that he was betting on JGBs finally declining (and thought Japan would eventually default). However, he clearly stated that a challenge was to provide income or returns until the long-term speculative "bets" paid off. He did not indicate he thought the JGB decline was imminent, just that the Japanese demographic tide had turned and he was confident the debt burden had become unsustainable.
interesting article sensationalizing the issue, but unfortunately the economic logic behind it is flawed. Japan doesnt need to 'borrow from abroad' to plug this 'income gap' - both these ideas are not based on sound economic theory for a country operating under Fiat Money with flexible exchange rate - well, that point may be debated a little bit for Japan :-)
nothing will happen to JGB yields which will remain structurally low, and the rest of the developed world will join the 'JGB like' zero yield market.
but i'm sure the writer was able to generate traffic to his website based on this :-)
interesting article sensationalizing the issue, but unfortunately the economic logic behind it is flawed. Japan doesnt need to 'borrow from abroad' to plug this 'income gap' - both these ideas are not based on sound economic theory for a country operating under Fiat Money with flexible exchange rate - well, that point may be debated for Japan :-)
nothing will happen to JGB yields which will remain structurally low, and the rest of the developed world will join the 'JGB like' zero yield market.
but i'm sure the writer was able to generate traffic to his website based on this :-)
FX reserves aren't much use for funding government deficits, as spending them down funds increased net imports and/or withdrawal of foreign investment, which undermines domestic GDP and government revenues.
Japan, like the US and Europe, has only two choices: austerity or monetization. Austerity is much better in the long run, but more difficult in the short run, especially politically.
Japanese are all for one and one for all. Now, that might be an overstatement, but generally they are much more tight-knit and imperturbable. You want to live somewhere life goes on unaffected? Go to Japan. Things change slowly. It may be boring. But there are few surprises, and no egomaniacs like Soros stirring the pot.
Japanese are all for one and one for all.
Yep, they sure are, as long as your Japanese...............they are Xenophobes, and unless your Japanese, your gaigin.
A point most Japan observers miss: there are plenty of Japanese available for employment - who? - women. Women traditionally stop working after marrying. There is an untapped pool of women available for the workforce. This is Japan's one possible "out" if it chooses to use it.
I am afraid Japanese housewives are not available to work; they are too busy trading FX.
So how will this effect the carry trade?
Higher interest rates are good because more money is put into the pockets of people who save. I look at higher interest rates as "reflationary."
Dominoes falling at random points in time. Eventually they all start to go at once.
In a race to the bottom in a deflationary manufacturing environment, Japan has a 20 year headstart on the rest of the world.
The umbrella the USA holds over Japan is nuclear, financial and highly motivated by self-interest of a global geopolitical partnership. Messing with the ruin of Japan is like betting against the FED- Got Deep Pockets?
I've thought the same, even very recently about Japan having nowhere to go but to monetize.
But...
Japan has $1T of foreign asset reserves.
http://www.mof.go.jp/english/e1c006.htm
They could fund all of their deficit needs entirely for 2 full years without selling another yen of JGB debt for that entire period.
Or much longer if you assume they do a mix of selling new JGB debt and selling off reserves.
In that time, they could raise taxes to boost revenues and offset the deflationary/contractionary impact by partially monetizing their existing debt (to permanently reduce ongoing government debt burdens).
The irony of this is that where the logic process started with an assumed JGB selloff, the real next step would be a US treasury selloff (since thats what Japan holds). Furthermore, the Japanese government would in effect be selling its dollars and buying back yen to do this. So it would mean a stronger yen, creating a perfect environment to monetize at least an equivalent 85T yen. Total government debt is 733.8T, so 11.58% of the debt would be instantly reduceable.
(Besides, the best thing that can happen to Japan is their yen weakens to 120 plus, as their exporters regain a competitive advantage, and boosts tax revenues up).
If Japanese equities were unfortunate enough to crash into a weak yen or high monetization environment (unlikely), they would represent the next buy of the century.
This is much better thought out than your mcD's index, but Richmond is right, sovereign debt shorts only pay if, when crunch-time comes, the central bank refuses to monetize. Given the BoJ's history, that's obviously not a safe bet.
The Japanese government can't afford to pay its creditors, but its creditors are its electors. It's like the board of a company with very bad results, it can only stay on as long as it keeps its shareholders in the dark. A slowly accelerating monetization would be a lot more surreptitious than default and restructuring. Especially with so many IB analysts and academics calling for more QE. There's a new opinion piece to that effect in the FT almost every day now.
I'm just getting too numb to care any more.
it seems sad. the japanese have worked so long and so hard and are still plagued by poverty.
http://covert2.wordpress.com
Nice piece of self promotion.
Nipponese elite have benn stabbing their people in back for quite awhile now doing the Illuminati's bidding.
I remain unconvinced about shorting sovereign debt, having briefly tried it when it earlier seemd to make sense. The Fed can print money and intervene in the Treasury market, and BoJ can print and intervene in the JPY market, and hold rates low right into the face of a hyperinflationary explosion. Since all major currency-thingies are fiat, issued by money-printing CBs; in a race to the bottom, short them against what? People say things like " the Fed can't print money fast enough to (do blah blah blah). Not true. Actual printing not required, all Ben has to do is click bigger numbers. The USD will collapse in buying power in this event, but that doesn't prevent him from holding rates low. Then and only then is it time for "New and improved currency thingy", also issued by some crime syndicate CB, this time internationally so as to make it harder for people to do anything about it.
And if you're going for anything but a trade - all the way to a huge structural shift - what are you going to get paid back in? I'm not a big enough trader, but is the counter-party going to let you buy something like gold? That might be interesting, but not quite the same trade. So, if the JGB went to 4%, that would be a great profit, but my sense is that you'd have a hard time getting out as the currency would quickly be collapsing...
I'd rather bet that Japan will be around long
after the current crew of hedge fund traders are bust and gone.
http://www.ft.com/cms/s/0/01350274-771e-11df-ba79-00144feabdc0.html
http://www.ft.com/cms/s/0/a01c3edc-74be-11df-aed7-00144feabdc0.html
Signs of BoJ desperation and unsustainability.
However, I am not so sure about this statement.
>The tipping point is close, and when it hits, Japan will have to borrow from abroad in size.
In reality, the Yen is surging while BoJ buys JGBs every month.
Of course, I don't want to buy JGBs, but shorting it may result in insomnia for some time.
There any liquidity in futures past 10y?
Enough liquidity to trade the 20y if you are an investor that can buy futures costing $1million.
I would not recommend going for the mini-20y, or as a matter of fact, any mini-JGB for private investors since it had failed due to low liquidity once, and I don't think there isn't much liquidity as of today.
This is the first time I actually took a look into the liquidity and popularity of mini-JGBs and the best advice I can give you, is leave those trade for the professionals.
I suspected as much with the 20s. Somebody said what I was thinking further down... everyone wants to short the long end with a low carry cost vehicle.
oya, hajimemashite to domo.
Kimi wa genki desu ka?
Bochi bochi genki desuyo.
Korekaramo yoroshiku!
Boku no namae wa JM desu. ;-)
nothing new here. waste of virtual space.
This is one of those trades you know is going to work someday, but 'someday' might still be 20 years from now. Shorting JGBs would be tantamount to fighting all the financial powers on earth.
+1! We all know that Japan is broke and has been for years. When will it catch up to them. Weeks, months or years? That is the problem betting against the system.
Is this the trigger for higher global rates despite low global demand?
Lol, Exaclty...I contstantly hear obvious reasons why something is going up or down like Kyle's comments above. As I have learned, only if it was that easy. This market is definitey rigged and it is highly sophisticated. The counter intuitive strategies are designed specifically for this type of thinking. Look what is happening in the Quant space. Traditionally these funds went long high quality low risk stocks and shorted low quality high risk stocks. Guess what? Someone figured out taking the opposite position would yield big profits and its working. The Hayman Fund's position is just a profit pool waiting to be harvested.
This is obsolete thinking.
+10
Julian Robertson did pretty well shorting JGBs...not
I have been asking every thread where I see JGB's as a short....exactly how does a private, small investor short the JGB's specifically. I am not looking for a correlated trade...I am looking to trade specifically the JGB.
Do I need to go through a special brokerage account or is this the kind of trade just for institutions?
I have been trading stocks only for 20 years but this sort of trade is new to me.
Any help would be greatly appreciated.
turkbevi,
You should be able to piece together the play you are looking for through a combination of LONG/SHORT in one or more of the following ETF's:
-
DDY
-
BWZ
-
BWX
-
EWJ
-
FXY
-
JYF
-
UYY
-
YCL
-
YCS
Note that volume is sparse in most of these vehicles. Good luck!http://www.gftuk.com/cfd/market-info/bonds.asp
CFDs might be helpful.
Oh, is it my turn. Ok might as well
Bonzai Bitchez!!!
I think I've heard this Japan is in a deep shit story for about 20 years now.
Yeah,Japan has been in deep caca for 20+ years..........
Yet we have managed to get as bad, if not worse, in 2 years,
Race to the Bottom.
Newest currency had Alfred E Newman on the $100.00 Fed Res "NOTE".
NOTE, that...Obligation to pay.
Face it, we are living in a LSD induced Lucid Dream.
This time is different. Until it isn't. It is what it is.
Another bitchez moron.
Women owned by tiny, tiny trees?
Sorry. I see what you mean.