{"id":88637,"date":"2016-04-25T13:51:14","date_gmt":"2016-04-25T17:51:14","guid":{"rendered":"http:\/\/countingpips.com\/?p=88637"},"modified":"2016-04-25T13:51:14","modified_gmt":"2016-04-25T17:51:14","slug":"japans-infamous-widowmaker-trade","status":"publish","type":"post","link":"https:\/\/www.investmacro.com\/forex\/2016\/04\/japans-infamous-widowmaker-trade\/","title":{"rendered":"Japan\u2019s Infamous Widowmaker Trade"},"content":{"rendered":"
April 25, 2016<\/div>
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By WallStreetDaily.com<\/u><\/a> \"widowmaker-trade\"<\/p>\n

The left main artery is absolutely critical to your survival.<\/p>\n

This coronary artery and its branches provide a significant amount of oxygenated blood to the heart muscles.<\/p>\n

Cardiologists sometimes refer to the left main artery, or a blockage within it, as the \u201cwidowmaker.\u201d<\/p>\n

This sinister nickname refers to the fact that an obstruction in this vital blood vessel foments the acute risk of a sudden, massive heart attack with a high mortality rate.<\/p>\n

Like the human body, the financial markets have their own widowmaker, and it continues to confound traders and kill their capital.<\/p>

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The chart below shows the yield on 10-year Japanese government bonds (JGBs).<\/p>\n

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There have been a few counter-trend moves, but interest rates in Japan have experienced an inexorable decline for around 25 years.<\/p>\n

Yet, for a decade or more, many traders and prominent hedge fund managers have bet on rising rates and falling JGB prices in hopes of producing a profit. Remember, bond yields and prices are inversely related.<\/p>\n

The JGB bull market has continued unabated despite Japan\u2019s ever-growing mountain of government debt. In fact, Japan\u2019s government debt-to-GDP has risen above 240%, the highest level in the world.<\/p>\n

However, the market isn\u2019t implying that Japan\u2019s at risk of default\u2026 yet.<\/p>\n

And until we see excessive weakness in the Japanese yen and a high inflation rate, that\u2019s not going to change.<\/p>\n

Terminal Decline<\/h2>\n

Japan is actually in the throes of gargantuan deflationary<\/em> pressures due to bleak demographic trends.<\/p>\n

The country\u2019s total population peaked around 2008.<\/p>\n

It may seem modern and teeming with cutting edge technology, but Japan has one of the most rapidly aging populations on the planet. In 1950, roughly 5% of Japan\u2019s population was over the age of 65. Now, over 26% of the population is over 65.<\/p>\n

Given Japan\u2019s shrinking population and increasingly geriatric society, it\u2019s no wonder economic growth has remained elusive. It\u2019s also not surprising that the Bank of Japan (BOJ) has had such a hard time spurring inflation.<\/p>\n

Together, tepid economic growth and inflation equate to low interest rates.<\/p>\n

Plus, the BOJ is hoovering up JGBs as part of its quantitative easing (QE) program, which reduces the supply of government bonds.<\/p>\n

Today, Japan\u2019s yield curve is negative<\/em> out past 10 years, and the 40-year JGB is yielding just 0.28%. Just a few years ago, these levels were seemingly implausible.<\/p>\n

Simply looking at yields, however, provides an incomplete picture.<\/p>\n

Bond Math<\/h2>\n

When bond yields decline, prices rise, but prices rise even faster the lower yields go. This is what\u2019s known as convexity.<\/p>\n

This year, the 10-year JGB is already up over 3%, despite a small 0.4% decline in yield. You can see why shorting JGBs is the quintessential widowmaker trade.<\/p>\n

However, because of this convexity and the strength in the yen since mid-2015, I believe a fantastic pairs trade for hedge funds has presented itself: long 10-year U.S. Treasuries (T-Notes<\/a>) and short 10-year JGBs. This trade has healthy positive carry (pays you to be in it), and you\u2019re hedged if global interest rates continue to decline.<\/p>\n

Nonetheless, hedge fund managers inclined to bet on Japanese rates have probably already done so, and after the appearance of negative JGB yields this year, they\u2019re likely experiencing cardiac arrest.<\/p>\n

Safe (and high-yield) investing,<\/p>\n

Alan Gula, CFA<\/p>\n

The post Japan\u2019s Infamous Widowmaker Trade<\/a> appeared first on Wall Street Daily<\/a>.<\/p>\n

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 <\/p>\n","protected":false},"excerpt":{"rendered":"

By WallStreetDaily.com The left main artery is absolutely critical to your survival. This coronary artery and its branches provide a significant amount of oxygenated blood to the heart muscles. Cardiologists sometimes refer to the left main artery, or a blockage within it, as the \u201cwidowmaker.\u201d This sinister nickname refers to the fact that an obstruction […]<\/p>\n","protected":false},"author":3,"featured_media":0,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[],"tags":[],"class_list":["post-88637","post","type-post","status-publish","format-standard","hentry","no-post-thumbnail"],"_links":{"self":[{"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/posts\/88637","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/users\/3"}],"replies":[{"embeddable":true,"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/comments?post=88637"}],"version-history":[{"count":2,"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/posts\/88637\/revisions"}],"predecessor-version":[{"id":88675,"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/posts\/88637\/revisions\/88675"}],"wp:attachment":[{"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/media?parent=88637"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/categories?post=88637"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/tags?post=88637"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}