Bass to Koll Bearish on JGBs From Opposing Corners
Hedge fund manager J. Kyle Bass and JPMorgan Chase & Co.’s Jesper Koll, who hold opposing views on Abenomics, both agree a selloff in Japanese government bonds is not over.
Bass, whose Hayman Advisors LP made $500 million amid the U.S. subprime crisis and is now betting on a Japanese fiscal collapse, said the Bank of Japan will have to “dramatically” increase bond-buying efforts to counteract selling by investors. Koll, the head of equity research in Tokyo who forecasts a 17 percent jump in the Topix stock index by the end of the year, said 10-year JGB rates will almost double to 1.5 percent as people flock to higher-yielding assets.
Japanese bonds have led declines among major global markets this quarter, according to data compiled by Bloomberg and the European Federation of Financial Analysts Societies. Koll says that’s to be expected as economic stimulus by Prime Minister Shinzo Abe jump-starts the third-largest economy. Bass characterizes the selloff as a warm-up for a more rapid exit of funds as finances worsen in the world’s most-indebted nation.
“There’s nothing weird with long-term interest rates going up,” Koll said in an interview with Bloomberg Television on May 24. “JGB yields go up with the economic recovery. It’s a healthy sign.”
BOJ Governor Haruhiko Kuroda said last week the central bank has put in place sufficient monetary easing and that he wanted to minimize bond-market volatility. That’s after 10-year JGB yields rose to 1 percent for the first time since April 2012, more than triple the all-time low reached last month, a day after Kuroda announced unprecedented bond buying.
Japanese shares plunged the most in two years on May 23, trimming gains since November when Abe called for expanded fiscal and monetary stimulus before elections that made him prime minister. The Topix Index of shares slid 2.7 percent as of 9:30 a.m. in Tokyo. It rose 0.5 percent on May 24 after a 6.9 percent slide the previous day.
Corporate earnings and the economy are “recovering nicely,” according to Koll, who predicts the Topix will end 2013 at 1,400 from the close last week of 1,194.08. The increase in JGB yields is “confirming that the credit cycle is expanding and that the labor market is recovering.”
The benchmark 10-year JGB yield slid two basis points to 0.825 percent today, the lowest in the world after Switzerland’s rate and compared with a five-year average of 1.13 percent. The rate will end the year at 0.72 percent according to a Bloomberg survey of banks and securities companies, with the most recent projections given the highest weighting.
The 2.2 percent drop in JGBs maturing in more than one year so far this quarter is almost three times the 0.8 percent loss in U.K. debt, the next biggest loser among 26 sovereign markets tracked by the EFFAS indexes. The cost to protect Japanese bonds for five years with credit-default swaps rose to 71.9 basis points on May 24, the most since April 9, according to CMA prices.
Kuroda said in Tokyo yesterday that Japan could cope with an increase in bond yields, citing an April BOJ report indicating rates could rise by between one and three percentage points in an improving economy without causing instability.
Selling from JGB investors has “overwhelmed the BOJ’s ability to purchase them,” according to Bass. “The BOJ is going to have to dramatically expand its JGB purchasing operation if it is going to be successful in holding back rates.”
Abenomics may succeed in spurring nominal growth in Japan this year, though the weak yen isn’t a panacea that can sustain the economy and equity prices, Bass said in an interview with CNBC last week.
Bass said in an interview with Bloomberg Television last month that an increase in JGB yields following the BOJ’s April pledge was a sign of stress in the market. He said in January he’s buying bearish options that are “way out of the money” to bet against Japan.
“The BOJ dominates asset markets for better or worse,” Bill Gross, co-chief investment officer at Pacific Investment Management Co., said in a post on Twitter. “Watch JGBs, the yen and the exodus from each.”
Elsewhere in domestic credit markets, Sony Corp. said in a filing to Japan’s Ministry of Finance that it plans to sell 150 billion yen ($1.49 billion) of bonds targeting individual investors. The notes are to be priced on June 7 and underwritten by Daiwa Securities Group Inc., Mitsubishi UFJ Morgan Stanley Securities Co., Mizuho Financial Group Inc., Nomura Holdings Inc. and SMBC Nikko Securities Inc.
Toshiba Corp. sold 90 billion yen in notes maturing in three, five and seven years, according to a statement by Nomura on May 24. The securities have coupons of 0.47 percent, 0.75 percent and 1.06 percent, according to the release.
Japan’s corporate bonds have handed investors a 0.37 percent loss this month, compared with a 1.45 percent decline for the nation’s sovereign debt, according to Bank of America Merrill Lynch data. Company notes worldwide have lost 0.72 percent during the period, the data show.
Kuroda and his board last week affirmed a policy set on April 4 of doubling monthly JGB purchases to expand the monetary base and fuel 2 percent inflation in two years to reflate the economy. At a press briefing on May 22, he said that gains in yields could be expected as the economy improved, after saying previously that the central bank aimed to lower interest rates.
“I don’t think yields will continue to rise,” Nicholas Smith, Tokyo-based strategist at CLSA Asia-Pacific Markets, wrote in an e-mail. “Kuroda is keen to rein in bond yields. I wouldn’t be at all surprised if it is 20 basis points lower in a month.” One basis point is 0.01 percentage point.
In minutes released today of the BOJ’s April 26 meeting, a few board members attributed increasing bond volatility to central bank debt purchases. A few members said it would be difficult to reach the 2 percent inflation target by the end of fiscal year 2015.
The BOJ supplied 2 trillion yen to the financial system on May 23 as bond yields rose, its second such market-calming infusion this month. Price volatility for JGBs surged 2.6 percentage points this year to 3.64 percent as of May 24 based on a 60-day reading, the biggest advance among EFFAS indexes.
“The volatility we’ve seen is the market is shocking,” said Tetsuya Miura, the chief bond strategist at Tokyo-based Mizuho Securities Co., one of the 24 primary dealers obliged to bid at Japan’s debt auctions. “Unfortunately, Kuroda can’t cherry-pick the best outcomes of his stimulus. As long as Kuroda has a goal of achieving 2 percent inflation in two years, he can’t extend the time horizon and that will add stress to the JGB market. ”
Japan’s outstanding debt was 991.6 trillion yen at the end of March, a ministry report showed this month. It’s projected to reach 245 percent of gross domestic product this year, according to an International Monetary Fund estimate, the highest ratio in the world.
Japan’s economy expanded at an annualized 3.5 percent pace last quarter, the fastest rate in a year, a government report showed on May 16. Gross domestic product will probably grow 1.4 percent this year and 1.3 percent in 2014, according to median estimates in Bloomberg News surveys.
The first two “arrows” of so-called Abenomics, fiscal and monetary stimulus, have propelled gains in Japanese shares and weakness in the yen. Markets are still awaiting details on Abe’s third arrow -- structural reforms to help businesses.
“If we fail to end deflation here and sketch out a growth scenario, it’ll be the beginning of an end” for Japan, said Ayako Sera, a market strategist in Tokyo at Sumitomo Mitsui Trust Bank Ltd. “The direction of bond yields is probably up, and the only difference is its speed.”
Sera added that foreign investors “have tried bearish bets on JGBs again and again and failed every time.”
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