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Strategies & Market Trends : Currencies and the Global Capital Markets -- Ignore unavailable to you. Want to Upgrade?

To: Michael Friesen who wrote (285)	6/25/1998 3:39:00 PM
From: Henry Volquardsen	Read Replies (1) \| Respond to of 3536

Michael, I didn't say the Japanese debt was going to increase by a trillion. I was just using it as a worse case scenario for Chip. Also debt/GDP ratios are not coordinated with yields. If it was US rates would be lower than German rates. The question about wether to short the japanese bond market is a very good one. For two years people have been screaming that JGBs are an obvious short. Every major hedge fund has tried to do it. And one of these days it will be one of the most spectacular shorts available in fixed income. The problem will be timing. Here is the issue. Short term interest rates are very low. Whenever a short raid is attempted on JGBs it pushes long term yields to where the cost of carry is horrendus. This creates a situation in which the bears need continued downward momentum just to keep their nose above water. Once the JGB stops declining even for a moment the bears start covering their shorts to try to avoid the carry. This generally causes the JGB to rally just as hard as it declines. What you need to break this cycle is for short term rates in Japan to rise. But this is not going to happen until the economy is well underway again. And that is not going to happen until the government finally gets off its ass and does something. And no one knows when that is going to happen. In the meantime the bears keep getting their claws pulled. I have made good money the last two years counterpunching the JGB bears. Henry