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The Next Big Crash Will Be in the JGB Market

The collapse of the Japanese government bond market has long been the holy grail of the international hedge fund community. Unfortunately, it has remained just that for nearly 20 years, much talked about, unattainable, and some would say imaginary. During the early eighties, I took the entire pension fund of the Foreign Correspondents’ Club of Japan out of US dollar bonds and put it into JGB’s, then yielding 10%, earning the eternal gratitude of the staff there. Even today, I am showered with free drinks and lunches when I visit Tokyo. After the 1990 stock market crash, JGB’s rocketed on a flight to safety bid, the ten year eventually reaching an unimaginable yield of only 0.46%. During this decade, we have largely traded in a 1.20% to 1.90% range. Every wave of government stimulus spending brought hopes of an imminent collapse in bond prices. But the country’s gun shy institutional investors weren’t buying it, and the end result was soaring national debt, a still stagnant economy, and 1,000 bridges to nowhere, some of them truly gigantic. Hedge fund guru, Julian Robertson, annually wrote a nine figure check to the JGB market anticipating a rate spike which never appeared. However, the day of reckoning for the JGB market may at last be coming. The savings rate has dropped from 20% during my time there, to a spendthrift 3%, because real falling standards of living leave a lot less money for the piggy bank. The national debt has rocketed to 200% of GDP, and 100% when you net out government agencies buying their own securities. Japan has the world’s worst demographic outlook. Now that the country is entering its third lost decade, unfunded pension fund liabilities are exploding. I’m not saying this is going to happen tomorrow. But when the break does come, you can expect the big hedge funds to dog pile in. And if JGB’s do go down the crapper, can the yen be far behind?