Photographer: Kiyoshi Ota/Bloomberg

HSBC: Wave Goodbye to the Widowmaker — Japanese Yields Are Technically Poised To Explode

A reprieve for long-suffering shorts.

If HSBC Holdings Plc's Head of Technical Analysis Murray Gunn is right, we're in for the death of the Widowmaker making widows.

A bet against Japanese bonds — in light of the nation's elevated indebtedness and extraordinary monetary stimulus deployed in an effort to defeat deflation — has been dubbed the 'widowmaker' trade for a rather self-evident reason: it hasn't worked for years.

Since the start of 2006, the yield on the 10-year Japanese government bond has slipped from a high of just over 2 percent to a low of negative 0.29 percent in late July as investors snapped up the debt and forced prices higher.

That changed recently, however. The yield on this 10-year sovereign debt spiked in the aftermath of the Bank of Japan's latest decision, in which Governor Haruhiko Kuroda's stimulus failed to sate investors' appetites.

Gunn sees this move higher in yields as the start of a new Elliott wave, which a technical pattern that tracks particular phases of price action as they move up and down within a channel.

"The Japanese Government Bond market is once again showing signs that it may be ready to start the long-awaited sell-off," he writes. "The JGB 10-year yield exhibits a long-term Elliott Wave ending diagonal pattern that, once complete, should result in a move up in yield that should astonish even the most ardent JGB bears."

Source: HSBC

"A move back up through zero would be the first signal that a fast move up towards 1 percent and beyond was probably on," he added.