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Higher JGB yields could pose a problem for stocks. — Bloomberg
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And like something surreal out of Stoppard or Beckett, it’s never worked out.
Betting on JGB yields to rise thoroughly deserves its nickname: the widowmaker.
Now, those widows are enjoying some profits.
The surge in yields was taking shape even before the ruling party gambled on installing Sanae Takaichi, a firm believer in fiscal stimulus, as the country’s first female prime minister.
In the three months since she took office, yields have gone into overdrive.
Jordan Rochester of Mizuho says that he’s been selling Japanese rates (betting on yields to rise) since June, and “nearly half of the returns have been in the past two weeks.”
He describes this as “punchy, even for us hawks.”
Ten-year JGB yields, once held at zero under the Bank of Japan’s (BoJ) controversial yield curve control policy, are now
comfortably higher than equivalent yields in China as the tectonic plates beneath Asia’s biggest economies shift.
Yields in China, once seen as a perpetual growth engine, exceeded JGBs for decades, but no more:
A confluence of factors can explain the shift:
> Takaichi herself has proved more aggressive than advertised, and says 2026 will be a major turning point for Japan.
Her approval ratings are startlingly high, boosting market confidence that another fiscal expansion will really happen.
Speculation is rising that she’ll call a snap election this year to bolster her position.
That will naturally tend to raise yields.
> The BoJ sounds more hawkish: It was unanimous in its decision to hike rates to a 30-year high last month, and its chief Kazuo Ueda now says the bank will keep raising rates.
Wages and prices are highly likely to increase together moderately.
> The data – the labour market, business sentiment (as measured by the regular Tankan survey), and purchasing manager indexes – look strong.
Inflation sends contradictory signals, driven to a huge extent by food, but this no longer looks like an economy needing zero interest rates to prop it up.
> Fiscal policy continues to unfurl in a way likely to push up JGB yields.
Most recently, the Takaichi administration has laid out plans for a major arms buildup as it adjusts to new geopolitical realities.
That will bring the military budget to a record proportion of gross domestic product.
International dynamics also tend to dictate that Japan’s bonds will continue to perform poorly.
Felix Vezina-Poirier of BCA Research commented: “JGBs remain in a lose-lose position. If global growth reaccelerates, the BoJ will be forced to hike more and faster than markets expect.
“If growth slows, JGBs are likely to underperform higher-yielding DM peers.
This could yet create problems for a government that intends to borrow, even at higher rates.
It’s a potential disaster for carry traders outside Japan who bet on a weak yen and low JGB yields by borrowing in Japan – although for now, the yen remains weak and impervious to rising rates.
That’s in part because Japanese investors are still enthusiastic buyers of international securities, which weakens the yen. There must, however, be a risk that that they begin to bring that money home.
Tim Baker of Deutsche Bank AG argues: “Could Japan investors tilt back domestically?
“Heavy foreign exposure made sense in the past with very low JGB yields, a lagging equity market, and a weakening yen.
But that setup appears to have shifted to a reasonable degree.”
Perhaps an acceleration of BoJ hikes could provide a catalyst.
Another catalyst could be the stock market.
The Topix index has set a series of all-time highs to open the year, with valuations surging to levels not seen in decades.
Investors are at last beginning to believe that the value the metrics have shown to be locked up in corporate Japan is about to be realised.
As Japan trades at a massive discount to the United States (even if the Magnificent Seven tech stocks are excluded), this could potentially run much further:
Higher JGB yields could pose a problem for stocks.
But not yet. Comparing stocks’ earnings yield (the inverse of the price to earnings) with 10-year yields suggests that bonds are still helping out stocks:
A big yen appreciation would bring tighter Japanese money to the rest of the world, which has grown accustomed to treating it as a limitless source of cheap credit.
But not yet. For now, the bottom line is that shorting JGBs is making money.
If Takaichi can deliver, then the trade will also continue to win. — Bloomberg
John Authers writes for Bloomberg. The views expressed here are the writer’s own.
Article by JOHN AUTHERS
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