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

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


  1. You're right I see them on optionsxpress, but what was Bass talking about, a cheap swap?

  2. Hey DV, How you been? I know it's been a while...the day job is killing me.

    Do you have a view, on which way the Nikkei will swing on JGBs selling off? In a rational market, if the catalyst is a less credit-worthy government, I would think the N225 would sell off. But money flow, could prop it up.

    IB currently only offers March 2011 FOPs and Sep 2011 FUT on JGBs...but the nikkei options go out to 2014. Wondering if we can play JGB yields by proxy....and just, expect volatility.

  3. Mr.E, I couldn't figure out a way.........any advise?

  4. Hey, yeah it's been a minute. Good questions. I'm going to watch JGBs/N225 from now on, as well as SPX/USTs. If hedge funds attack JGBs without any reflationary growth pressures, that would shock the pricing of risk and probably harvest fresh N225 volatility. I charted them both out at Bloomberg.com on Aug 27 when Nikkei shorts covered and bonds sold off (pre intervention). I believe the move was anticipating intervention combined with some ok economic data.

    9,000 was the level to hold, if Nikkei breaks that level again, I bet it tests around the lows. If positive inflationary pressures hit Japan, I'm guessing N225/JGBs move inversely with volatility during catalysts (imo). At some point in the next 10-20 yearsJapan has to be a contrarian play, no? But Kyle Bass thinks Japan is at the Keynesian endpoint. If that's the case, I don't see how there wouldn't bring volatility for ya. Thanks for the Japanese real estate data on your recent post.

    This was an interesting article I came across today. http://www.ft.com/cms/s/0/e6e11316-c27e-11df-956e-00144feab49a.html

    Japan’s fledgling activist funds
    By Lindsay Whipp in Tokyo
    Published: September 19 2010 09:35 | Last updated: September 19 2010 09:35
    Activist funds in Japan may not be grabbing the headlines these days, but away from the spotlight there are funds and consultants plugging away at encouraging companies to improve corporate governance and shareholder returns.

    They include asset managers such as Taiyo Pacific Partners, one of Asuka Asset Management’s funds, and Japan Engagement Consortium, which was set up by Governance for Owners – an international organisation that en gages with companies on behalf of investors.

  5. JGB futures trade a few hundred thousand a day. It isn't hard to short JGBs.

  6. Kyle Bass Expects Radical Government Intervention in Japan (9/7/2010) Absolute Return + Alpha Magazine

    "As he bets on the country's decline, Bass writes that the yen and Japanese government bonds are experiencing a short-term squeeze that will result in more intense government-led responses"


  7. Bass has access to cheap swap, what are the option for the retail investor?



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