Barclays Asks Is It Finally Time To Short Japanese Bonds?

Tyler Durden's picture

For a decade or two, it's been dubbed the widowmaker (though truth be told, the losses are more bleed than massive capital loss like those holding US growth stocks currently), but as Barclays notes the Japanese bond market 'conundrum' may finally be ready to be played. (or not as we conclude below)

Via Barclays,

A new bond-market ‘conundrum’ – In Japan?

Michael Gavin, Tal Shapsa

We are always on the lookout for asset prices that seem inconsistent with the more plausible economic and financial scenarios. Sometimes these discrepancies point toward necessary alterations of our fundamental world view. In other cases, they point toward investment opportunity. At the moment, one of the most glaring discrepancies between macro and markets is the long end of the Japanese curve, for which the 5y5y forward JGB interest rate is a perfectly good indicator. This is shown in Figure 1.

A couple of points emerge from Figure 1.

First, the downdraft in forward interest rates dates to the end of 2010, roughly two years before the election of Prime Minister Abe rocked Japanese currency and equity markets. The 5y5y interest rate continued during the subsequent months, perhaps reflecting the ramp-up in BoJ bond purchases that is an important part of ‘Abenomics’. But timing suggests that it cannot all be attributed to the more expansionary policies that were put in place during 2013.

Second, the forward rate is at a level that does not seem compatible with an economy that has recovered from recession and attained something like 2% inflation. The interest rate was, in fact, roughly 100bp higher during the heart of the deflationary period in the early and mid-2000s and during the deep recession (and resumption of deflation) that accompanied the global economic downdraft of 2008-09 (Figure 2).

Finally, until the end of 2012, the downdraft in long Japanese rates coincided with an equally impressive downdraft in global, and specifically US, rates. But the move in Japanese rates continued throughout the 2013 US and global bond market correction. This is not utterly surprising, given the strongly segmented (that is, predominantly domestic) ownership of Japanese bonds. In light of this segmentation, it is not very surprising that the BoJ’s massively expanded bond-buying program pushed rates even lower during 2013. But if this is the explanation, the 2013 US experience highlights the potential precariousness of bond valuations in the eventual normalization of BoJ policy.

Such normalization will likely be driven, if and when it occurs, by successful recovery in and reflation of the Japanese economy. In this context, it is important to remind ourselves that the 3-1/2 year downdraft in longer-term interest rates has coincided with a labor market recovery and (core) price reflation that has been fairly steady during the past decade (although interrupted, of course, by the 2008-09 global event) and is now rather well advanced.

As our Japanese macro team has recently written, the Japanese Phillips curve is alive and well, and it seems to be shifting up in response to the extraordinarily expansionary BoJ monetary policy. The emphasis there was on the finding that the curve has not yet shifted enough to generate 2% inflation at an output gap of zero. This supports our view that the BoJ will decide that it needs to announce further policy easing at its July meeting.

But if we are confronting the long end of the yield curve with the most likely economic scenarios, the next 6-18 months are not the key drivers; we need to move the scenario forward several years. Here, we think Figure 2 supports two important points.

First, after roughly a decade of improvement, the labor market recovery is quite far advanced. At 3.6%, the unemployment rate is now lower than it has been since the late 1990s. The persistence of recovery during the past decade suggests that a full (cyclical) recovery of the Japanese economy is well within sight. It is possible to identify headwinds that may temporarily slow the recovery, but recent experience would seem to argue against the plausibility of a stagnant, low pressure economy as a medium-term scenario that should be priced into the long end of the JGB curve.

Second, the historical experience illustrated in Figure 2 suggests, as our Japanese research team has emphasized, that a tightening of labor markets does eventually generate rising inflationary pressure. It does not take a PhD in econometrics to see this; it is visible to the naked eye in Figure 2, during the 2002-07 phase of the recovery and in its more recent, post-crisis phase.

So although the jury is out on whether inflation will rise to the desired 2% by 2015, if we look ahead a full five years, we would assign a high probability to full cyclical recovery and a normalization of inflation to the 2% range. Along with economic normalization would come, it seems to us, some degree of normalization of monetary policy and the yield curve.

The conundrum, as we see it, is that nothing like this is priced into the JGB curve, which is failing to price even a partial, eventual success of the Abe government's reflationary agenda. Perversely, forward interest rates are even more depressed than they were in the mid-2000s, when deflation was substantially more entrenched, the economy much weaker, and monetary policy less reflationary.

In short, fundamental considerations seem to be at very strong odds with how markets are pricing the long end of the Japanese curve. For the moment, the BoJ's support of the JGB market is the most powerful argument against adopting a sceptical position toward JGB duration. If, as we expect, the BoJ announces an intensification and/or extension of its QE framework, the disconnect between fundamentals and market pricing may be prolonged. But as US bond investors learned in 2013, a policy-induced mismatch between fundamentals and markets can last no longer than the rationale for extraordinarily easy monetary policy. As we have recently suggested , a sceptical position toward Japanese bonds seems like an increasingly sensible way to position for policy success in Japan.


So Is the JGB curve right to discunt now chance of Abe's inflationary policy success? Perhaps that is why Japanese stocks are fading fast and catching on to the reality that printing money is not the solution...?

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FieldingMellish's picture

dis-cunt.... hehehehe...

Manthong's picture

Barclays Asks Isn’t It Finally Time To Short Our Broke-Dick Scam Bank?

chinoslims's picture

Very good show on the Yen and Japanese bonds.

Great idea.  With Japan ZIRP and Abenomics, why not get mortgage loan in Yen.  If Yen goes 200 USD/YEN, you've just halved the loan value of your house.  Great idea as long as the Yen no longer becomes flight to safety trade.

FutureShock's picture

All reguritation from Kyle Bass who put the real work in years ago. This article is old news and make them look like they are way late to the party.  


Thanks to Kyle I am up huge on my YCS (ultra short yen) play that I was in a year and a half ago.


btw Kyle had to jump through major hoops for him to get hi mort. in Yen, no mortal investor will ever get that.

Tasty Sandwich's picture

Normal home buyers don't really have the option of a Yen-denominated mortgage though.

It'd be funny to walk into Bank of America and request it though.  Even if they were willing to do it, imagine the interest rate and fees.  They'd probably just look at you like you're crazy though.

LooseLee's picture

Well, if the FED was not a PINKO COMMIE fascist entity, and it genuinely existed for the benefit of the common man, any mom or pop could secure a mortgage from the Fed at the current 'discount window' rate (in whatever currency one wanted to borrow in).  However, since this will never happen, I suggest we just END the FED and get on with it....

AdvancingTime's picture

By a continuing process of inflation, government can confiscate, secretly and unobserved, an important part of the wealth of their citizens. said John Maynard Keynes. As the central banks print like crazy to control interest rates on bonds they devalue the currency. While there are not many Bond Vigilantes there are many Currency Vigilantes. If the number of bond vigilantes begins to increase it will be a game changer!

A jump in what Japan needs to pay to borrow money would bring hyperinflation to Japan and destroy the myth that advanced Democratic countries are immune to hyperinflation. People would realize that the Dollar, Pound, and Euro are not safe from hyperinflation and they will want to get out of bonds in these countries as well. 

This could result in a huge monetization in these countries and then hyperinflation. These four currencies make up about 95% of the central bank reserves backing other currencies.  Faith in paper money in general will be shattered, Japan will be the first domino to fall, but not the last. More on this subject in the article below.

Manthong's picture

maybe the KB hedge will finally pay off.

remain calm's picture

I have been hopefully waiting. :)

nelsonmandella's picture

Holly shit what happened ? 



Bruce Krasting's picture

There is a graveyard filled with people who "picked the top" of JGBs. 20 years worth. BarCap is proposing a bet that Abenomics will work. A bit premature to call that after the big domestic sales tax increase.

drinkin koolaid's picture

This is bullshit. Is it time or isn't it.  I trade in real time with real money. I don't have the "luxury" of living in a world with question marks.

CrashisOptimistic's picture

It's always in a few years.

Where is Japan going to be in a few years with $104 oil?  How about where will they be with $150 oil?

CrashisOptimistic's picture

Oh and BTW, you shouldn't be trading in real time with real money.

You should be trading on a seasonal basis, funding purchase of fertilizer for your farm.

ArkansasAngie's picture

He see signs of a Japenese revival.  I see the opposite.

What I want to know is if the Yen will actually go to 115 like the Abester wants.

If he does, then I'm sure as shootin not going long the Yuan.

There is a currency war going on.

ECB wants the Euro to fall.

So ... is Uncle Sam going to sit there and let the dollar go up and up?

Does it matter?  Personally I'm thinking the Fed is tapering because they have to.

I'm definitely a spectator waiting here.  Waiting on my opportunity to buy in at economic value.

CrashisOptimistic's picture

Why would the Fed want Toyota Camrys to cost $5000?  Think that will help GM and Ford?

ArkansasAngie's picture

That be the point.

Protectionism is alive and well.

We can't take the hit to employment.

TheReplacement's picture

Then you should know exactly what TPTB will do - that which will damage us the most while not pushing so hard they actually get people to stop watching Kim's butt get bigger and march.

Haven't you picked up on the trend yet?

CrashisOptimistic's picture

"Personally I'm thinking the Fed is tapering because they have to."


It was all supposed to be data driven, but the numbers didn't improve towards end of last year.  They proceeded anyway.

There was talk about a scarcity of Treasury paper to buy.  The deficit was falling due to SS tax and millionaire's tax increase.  But the Fed can pay anything it wants for those bonds from the PDs.  It didn't matter how many seperate bonds there were.  If they wanted more money into PD pockets (to be redeposited at the Fed as excess reserves) they could just up the price.

Similarly, what's the deal at the ECB?  We always did think Germany said Nein!  But maybe that's not the source of Nein.

Maybe it's Nyet.

I view all things through the prism of the only thing that matters.  Oil.  Japan is utterly hopeless because they have none.  Russia may say Nyet to being paid in printed Euros.



buzzsaw99's picture

you first bitchez

Yancey Ward's picture

I don't see how Japanese rates can ever be allowed to rise unless the BOJ buys all the debt and burns the certificates.

Quinvarius's picture

Shorting sovereign bonds is like betting the central bankers cannot print enough money to buy them all.  It is a bad bet.  You should keep in mind that the main plank of what to do with excess money in Keynesianism is to immobilize it in sovereign bonds.  They can rig bond prices and FX relationships within their club.  But they can't stop smart money from leaving their system and going into hard assets.  No matter what they do, they need to print money for themselves and to do their manipulations and they won't be able to stop.  Eventually, it hits commodoties and hard assets.  Stocks may die.  They may manage keep their paper money alive.  But the bigger the government makes the paper pie in deficit spending, the bigger they will need it to be the next time around, and the bigger the bankers have to make their piece of it to stay on top.  They will print. 

CrashisOptimistic's picture

You only find discord and instability when the CBs start to become patriots and dispense with all the cooperation this and cooperation that. 

This happens when each realizes the cooperation isn't advancing his own country, and in fact is hurting it.

So it is no surprise the yen could not get past 103.  The Fed won't allow Camrys to be $5000.

caustixoid's picture

You assume Central Bankers work for the good of their own countries.   They don't.  They belong to the Basel nation. 

The BOJ already screwed their own country in 1985 out of loyalty certainly NOT to Japan.

They're coordinating their printing.   If Currency Wars take place, it won't occur between G-7 countries.

elwind45's picture

Carry Carrie CARRY

elwind45's picture

THE SWAP and the bollinger bandaids (electronic currency patches) and more WINE always more WINE

SilverIsMoney's picture

In my best Mike Ehrmantraut voice...

"Gee, Walter, ya think?"

elwind45's picture

I look at that 96-98 period on chart two and the mind begins to wonder.......another Asian contagion?

teslaberry's picture




JEEZUS PEOPLE. shorting jgb when the debasement schedule is clearly known by insiders--------that is a trap if I ever saw one. the one's in the know will print when the bonds are cheap (after they bought them) and they will dump all the stocks and risk assets when you are short (crushing you) 


if jim grant cannot 'get it timed write' and countless other 'experts' have lost billions. it stands to reason this is a game of insider information. the only way to win without having that information is not to play.


the only way to win when you have that information is find suckers who don't know that this is a game of insider information. 


this infotainment posted on zh is part of setting up the suckers. 

YHC-FTSE's picture

If there's a nutjob at an investment bank willing to give me 1bp on Japan jump risk, I'll buy with both my hands and feet outstretched. But I won't hold my breath. As someone mentioned already,  Kyle Bass has been there and done that.

SAT 800's picture

Is it finally time to short Japanese Bonds? Yes. Where's the hard question?