10-Year JGB Yield Spikes 25bps (27%) in 12 Days (Japanese Bonds)

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If you didn't notice, Japanese Government Bonds (JGBs) had a wild August. They reversed course abruptly starting on August 18. I told you to keep your eye on JGBs on August 9 and gave links to charts of various Japanese Government Bond yields at Bloomberg.com. Then on August 18 Kyle Bass (one of the few hedge fund managers who made bank shorting subprime mortgages using CDS) came on CNBC and said JGBs were a great short (lower price/higher yield). The market listened to him, 10-Year JGBs sold off hard and yields ran up to 1.15% from 0.90% in 12 sessions. (+25 basis points or 27%). They were overbought.

10Y Japanese Government Bond Yield 
(GJGBBNCH:IND via Bloomberg.com)

3-Month Chart

1-Year Chart

5-Year Chart

I'm not really sure how Bass went short JGBs (interest rate swaps, CDS, options on forward rates?). See this WSJ article (Bond Investors Bet on Japan's Day of Reckoning). I couldn't find a chart of a JGB interest rate derivative. His hedge fund (Hayman) probably structured a deal using an investment bank, like all the hedge funds did when they shorted CDOs using credit default swaps. I couldn't find JGB interest rate swap futures at CME.com but U.S. Treasury interest rate swaps are there and exchange traded now I believe (Eris Exchange about to launch, New Eris Exchange will trade interest rate swaps as futures). You can trade JGB Futures using optionsXpress or other futures brokers (SJBU10, SJBZ10).

Technically, the yield is at ceiling resistance from 1/2009 but could break that and test the upper end of multiple descending channels. In my opinion, interest rates, especially in fiscally stressed countries, will rise significantly at some point in the future due to either inflation risk or lack of demand for Government debt (read WSJ article). That's why I think people should monitor interest rates and their hedges around the world.

Elections in Japan are moving the bonds:

Japanese Political Battle Jolts Bonds - WSJ 
Shadow Shoguns Will Trash $5 Trillion Economy: William Pesek - Bloomberg
Japan’s Bond Futures Drop Most in Five Months on Stocks, Ozawa - Bloomberg
Japan's yields rise as Ozawa challenges Kan - WSJ

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