Rocky ride for Japan's government bonds
Nov 20, 2009
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"It's been quite a week for the ugly sister of the debt markets," says Gwen Robinson on the FT's Alphaville. Japanese government bonds (JGBs) have gone through some "strange gyrations" recently, with prices sliding and yields rising to 1.49% from 1.24% in early October, then rapidly falling back to 1.35%. While these percentages may not sound like large shifts, they're a big deal for the market in "these usually dull and often ignored instruments".
So what's been going on? The market has been hit by "growing fears among 'bond vigilantes' of rising government-funding costs in a few years' time", says The Economist. The country's gross debt already stands at a "staggering" 180% of GDP and the budget deficit is expected to be 10% of GDP this year, leaving investors concerned about whether the new government will get a grip on public spending. Fitch Ratings didn't help sentiment when it said that it may review Japan's rating if the debt burden rises significantly (the agency currently rates Japan AA-, its fourth-highest rating).
But none of this is news. So why the sudden slump in bonds and the even more rapid snap-back? Call it the 'Einhorn' effect, says Louis Gave of GaveKal. Noted hedge fund manager David Einhorn recently gave a speech to a value-investing conference in which he said Japan "may already be past the point of no return" and will never be able to repay its debts. This seems to have convinced a significant number of traders to short JGBs – despite it being "a long-standing tradition for macro-traders" to lose money this way.
Many may have failed to note the gulf between the way that foreigners view the JGB market and how it is seen at home, say Lindsay Whipp and Gillian Tett in the FT. Around 95% of JGBs are held by domestic investors and with short-term interest rates at zero and deflation entrenched, even the low yields on offer look attractive to them. So the fall in prices caused by the shorts was quickly capped by local buyers keen to increase their holdings. For now, it seems this "wall of demand" will prevent JGBs from weakening too much. But in the long run, if debt continues to rise, the situation could become more difficult.
• If you want to see how hyperactive China's stock-market is, take a look at how frequently its exchange-traded funds (ETFs) change hands. There are eight ETFs listed on the mainland, amounting to 9.5% of the total assets under management (AUM) by ETFs in Asia, says Deutsche Bank. Japan has 65 with 40.5% of the region's AUM. Yet Chinese traders account for 47% of Asia's daily ETF turnover, while Japan supplies just 14%.
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