Shorting Japanese government debt has been one of history’s greatest widow-maker trades. It looks so easy. Yields are microscopic with nowhere to go but up, and Japan is one of the most heavily indebted countries in the world. The logic has been compelling, and unprofitable, for over a decade. Now Kevin Muir thinks this trade’s time has come. We’ll see. From Muir at themacrotourist.com:
Remember when the trade-du-jour was to be short JGBs? All the cool kids had it on the sheets.
You couldn’t turn on CNBC without being blasted with Texas’s favourite hedge fund manager foreshadowing Japan’s coming demise.
Japan’s collapse seemed to be Kyle Bass’ raison d’etre. And he stuck with it for a long time. Have a gander at how young Kyle looks in the picture above. But more importantly, check out the level of the Dow Jones Index.
And it’s not like he was alone. As recently as last summer large hedge fund managers were still shorting JGBs by the bucketful. Crispin Odey had 35% in his fund in a long Australian bond / short JGB position.
I can’t claim I was immune to the siren lure of the short JGB story. After all, it was an awfully compelling story. It’s difficult to see how Japan will be able to manage its monster debt load without inflating it away.
Yet the great global bond rally of 2016 that drove European sovereign yields to batshit crazy negative levels, dragged Japanese government bonds along. Last summer, in a fit of panic when investors were convinced inflation would never again rear its ugly head, Japanese 30 year paper flirted with a 0% yield.
To continue reading: Japan – It’s Finally Happening