Kyle Bass, whose Dallas-based hedge-fund firm Hayman Advisors LP made $500 million in 2007 betting against U.S. subprime mortgages, said Japanese government bondholders’ reaction to the central bank’s unprecedented stimulus may foreshadow a broader selloff.
Japan’s 10-year yields touched a record low of 0.315 percent on April 5 and then surged to almost double that level in the same session, a day after Bank of Japan Governor Haruhiko Kuroda increased bond purchases by more than expected. Prime Minister Shinzo Abe, who had called on the BOJ to offer “unlimited” stimulus to end deflation, said this week that close attention needs to be paid to the bond market.
“This is the first deviation of the sanctity of that marketplace,” Bass, who has been betting on a collapse in the Japanese bond market for at least three years, said in an interview today on Bloomberg Television’s “Market Makers” with Erik Schatzker and Stephanie Ruhle. “Investors in JGBs panicked. And what’s fascinating to me is they just told you, ‘Don’t worry, we’ve got this.’”
Japan has the world’s heaviest debt load relative to its economic output, followed by Greece, prompting some investors to speculate that a push by Abe and Kuroda to stimulate the economy may undermine the bond market. BOJ officials said after a policy meeting last week they would boost monthly bond purchases to 7.5 trillion yen ($76 billion) as they set a two-year horizon for their goal of 2 percent inflation. They suspended a cap on some bond holdings and dropped a limit on debt maturities.
Historical price volatility of Japanese government bonds maturing in more than 10 years has jumped 11.9 percentage points this year to 14.6 percent on a 10-day reading, the second highest among the 25 sovereign markets tracked by the European Federation of Financial Analysts Societies and Bloomberg. That’s a reversal from the end of 2011, when Japanese government bonds were the least volatile globally.
“The investors ran the other way from the central bank, they didn’t run with it,” Bass said today. “I find that to be fascinating.”
Even after the recent moves, 10-year Japanese government bonds still only yield 0.53 percent, the lowest among the Group of Seven countries.
Abe said large-scale government bond purchases by the central bank could have a substantial effect on the market and that he expects Kuroda to “improve stability through close communication.”
Bass said he began publicly sharing his forecast of a collapse in Japan’s government-bond market in 2010. He has acknowledged that other bond investors have nicknamed his short position the “widow maker” since betting against the Japanese bond market to date has been fruitless.
“When I started sharing our views more globally it was the middle of 2010,” Bass said. “I said I believed the stress was going to show itself in the next three years. It’s pretty much three years in, or close, and the stress is beginning to show.”
Bass said in January he’s buying bearish options that are “way out of the money” to bet against Japan. Should the trade work, the payout will be “much better” than that of his wager against subprime mortgages, he said in today’s interview.
“In subprime, we thought about losing 11 percent a year and making 10 times our money,” Bass said. “In this one we think about losing 1 to 2 percent a year in this strategy and making 300 to 400 times our money.”