Apr

26

JGB (Japanese Government Bonds) futures were limit down on Friday, after CPI was confirmed at a rise of 1.2% yoy. CPI in Japan includes energy, so the rise was widely expected. Nonetheless, bonds were crushed. Indeed, since the recent peak of bond prices in Japan, which followed the Bears Stearns news, JGB futures have fallen close to 7 full points. Each point represents about 9.2 bp of a 10 year bond yield. Given the extraordinary low level of rates in Japan, such a move is unthinkable in percentage terms. Heres the rub: prices in Japan, excluding food and energy, akin to the USA CPI measure, rose just 0.1% yoy. Wages are declining and consumer spending is flat-lining, so it hard to see a real inflation problem arising here anytime soon. I am not a long term JGB bull, but if you think stocks are temporarily overbought and bonds oversold, then JGBs represent a great trading opportunity. Be careful though. The contact size of one JGB future is approximately 10x the size of an equivalent CBOT USA 10y future. JGB fututues are listed on the Tokyo Stock Exchange.


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4 Comments so far

  1. Stephen Alpher on April 26, 2008 11:33 am

    There is a mini-JGB contact that trades on the SIMEX. I believe it is 1/10th the size of the TSE contract.

    Government Bond markets all over the planet have gotten destroyed since the Bear Stearns event. In retrospect, its looking like a major stock market bottom and bond market top were put in on that Sunday night. Bond prices all over the were clearly priced for Armageddon. If we’re not getting that, bond prices will begin to reflect economic fundaments i.e. rising inflation. They’ve got a lot of room to fall.

  2. Anatoly Veltman on April 26, 2008 11:56 am

    At first look, the chart was interesting. Past 30-day 142->135 decline had few up-ticks. Then I realized: it just mirrored Nikkei’s 11500->14000 advance and 95.75->105Y depreciation; both were greater percentage moves. So you’re better off actively trading those instruments, and not face daily limits in JGB…

    It should be noted: latest C.O.T. (Commitment of Traders) report was positive for the Yen and negative for British, Canada, Aussie. Other signals included bearish Nasdaq, Gasoline, Platinum and Bearish divergence for 5y Note!

    My conclusion on JGB: yes, a bounce is probable - but hardly tradable. Better off using such bounce, if any - and get short. Beats the risk of counter-trend positioning…

  3. Ronald Weber on April 26, 2008 1:04 pm

    If there is really a sustainable re-inflation in Japan, I would then go for plain stocks. If history is any indicator, a market that shifts from deflation to “comfortable” inflation tends to see expanding P/Es. Japan is probably the only country that would benefit from rising inflation. JGBs are held 95% by domestic investors, mainly insurance companies, until maturity, so though the price drop coud be substantial I don’t think it would have devastating consequences, and anyway the rise in assets prices (if any!) would more than offset the bonds losses.

  4. gabe on April 26, 2008 1:08 pm

    Speaking of Bear Stearns, here is a comical piece from The Daily Show by Jon Stewart: http://www.thedailyshow.com/video/index.jhtml?videoId=164178&title=broken-arrow

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