Shorting Japanese Government Bond Futures

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jst_becuz
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Shorting Japanese Government Bond Futures

Post by jst_becuz » Thu Apr 11, 2013 10:26 pm

JGB yields near zero and becoming very very volatile. It seems to me that they only have one way to go and with the government essentially doubling the money supply until they end deflation (which is a very slippery slope to hyper-inflation), shorting those bonds seems like a low-risk, very high potential reward strategy. Anyone have thoughts about this and, more importantly, thoughts of the best way to use futures to do it? Is it as simple as shorting a June JGB futures contract via a futures trading brokerage account? I still need to look into minimum contract size, margin requirements, etc., but wanted to see if anyone else was doing this. Thanks in advance for any responses.

Beat The Street
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Re: Shorting Japanese Government Bond Futures

Post by Beat The Street » Thu Apr 11, 2013 10:31 pm

Check out ETNs JGBS and JGBD. It may be easier than doing it yourself, but I believe ETNs carry credit risk.
“Never ask anyone for their opinion, forecast, or recommendation. Just ask them what they have—or don’t have—in their portfolio.” -Taleb

Beat The Street
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Re: Shorting Japanese Government Bond Futures

Post by Beat The Street » Thu Apr 11, 2013 10:32 pm

Oh and full disclosure I am not doing this strategy and I would think most bogleheads aren't either. It seems an expected increase would be priced into the future contract.
“Never ask anyone for their opinion, forecast, or recommendation. Just ask them what they have—or don’t have—in their portfolio.” -Taleb

clacy
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Re: Shorting Japanese Government Bond Futures

Post by clacy » Thu Apr 11, 2013 10:37 pm

The short JGB trade has a nickname.... "The Widow Maker".

Keep that in mind and tread lightly IMO. People have been saying that for a decade or more now and so far it hasn't worked out like that.

If the BOJ buys the vast majority of the bonds that they sell, as is the case currently, what's to stop them from surpressing rates well into the future?

They have already said they are printing money and will double the BOJ's balance sheet, so the better trade to me would be to short the yen (which I am) and possibly long EWJ.

They have essentially said they're going to inflate come h*ll or high water.

jst_becuz
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Re: Shorting Japanese Government Bond Futures

Post by jst_becuz » Thu Apr 11, 2013 11:13 pm

BTS - rate futures don't trade like physical commodity futures. There's no implicit expectation of future prices built into the forward curve for the same duration. I have looked into the Powershares ETNs, but the 1) do have credit risk (not a huge deal over the short-term, but you never know when it will be), 2) are currently overpriced (about a 5% premium to NAV since PS halted new issuance of the ETNs temporarily, and 3) charge a management fee (0.5%) on the short and 3x short. BTW - I'd never use the 3x short... those products are an absolute disaster over the long term.

Clacy - I think there's a difference between thinking a 1.5% bond probably can't go much lower (price higher) and knowing that a 0.4% bond really can't go much lower unless they're going to push the yield negative. The convexity of the curve means there's very little to lose if rates fall from 0.4% to 0.3% for example, but a massive amount to be made if they go the other way, especially leveraged through a futures contract. The play is not to think JGBs will tank while the govt is buying an infinite amount of them. It's that I believe they will finally beat deflation with this strategy, much sooner than expected and will suddenly have an inflation spiral on their hands. That will lead to ending the program and even reversing course. I'd basically be rolling futures contracts with very low losses each quarter since the interest rate is so low assuming no movement in price while waiting this out. Then, when it eventually does move, it starts raining money on anyone who is short JGBs. I don't want to be short the yen (a very crowded trade due not only to currency speculation by the carry trade) when the JP Fed loses control of price stability and rates are forced higher.

I think I just need to do some homework on the mechanics of the futures trade. I wish there was a way to paper trade it and test the waters without having to sign up for a real account somewhere.

cbeck
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Re: Shorting Japanese Government Bond Futures

Post by cbeck » Thu Apr 11, 2013 11:30 pm

jst_becuz wrote:JGB yields near zero and becoming very very volatile. It seems to me that they only have one way to go and with the government essentially doubling the money supply until they end deflation (which is a very slippery slope to hyper-inflation), shorting those bonds seems like a low-risk, very high potential reward strategy. Anyone have thoughts about this and, more importantly, thoughts of the best way to use futures to do it? Is it as simple as shorting a June JGB futures contract via a futures trading brokerage account? I still need to look into minimum contract size, margin requirements, etc., but wanted to see if anyone else was doing this. Thanks in advance for any responses.
Sounds like the triumph of ideology over experience.

clacy
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Re: Shorting Japanese Government Bond Futures

Post by clacy » Thu Apr 11, 2013 11:40 pm

What about way OTM calls on Nikkei futures. As with all trades timing is everything of course but that may be a cheap way to play Japanese inflation without a huge downside risk.

I guess what I would be worried about is what happens to a short JGB trade if there is a sudden panic/correction soon? That is what also scares me about my spot USD/JPY trade. No one would be shocked if there was a 10%+ correction soon. In fact I rather expect it.

If this year is another example of "sell in May and go away" that could get nasty real quick.

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rmelvey
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Re: Shorting Japanese Government Bond Futures

Post by rmelvey » Fri Apr 12, 2013 1:52 pm

There are generations of traders who have been impaled shorting JGB using the exact same logic. Only use money you can afford to lose on this kind of a gamble. The JGB market isn't stupid, the people trading that market understand things that you don't.

If you are focusing on the "money supply" (defining the money supply is actually extremely arbitrary when you look into it) as predictor of inflation you are going to have a very bad time investing in Japan (or anywhere for that matter).

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stratton
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Re: Shorting Japanese Government Bond Futures

Post by stratton » Fri Apr 12, 2013 3:47 pm

You're too late anyway.

Another way to play the current situation is via hedged Japanese stocks, but that horse has left the barn too.

This move was telegraphed long enough ago the HEDGED Japanese index fund etf (DXJ) which is up ~50% in the last five months compared to ~25% for EWJ which is an MSCI Unhedged Japanese index.

Paul
...and then Buffy staked Edward. The end.

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