My Mistake Of 2013: Shorting Japanese Bonds
Charles Sizemore | Jan 06, 2014 03:14AM ET
You don’t get every trade right, unfortunately. Sometimes, even the best-thought-out investment thesis turns out to be flat-out wrong.
My biggest blunder of 2013? Shorting Japanese bonds.
In the June issue of Macro Trend Investor (formerly the Sizemore Investment Letter) I recommended readers buy shares of the PowerShares DB 3X Inverse Japan Government Bond ETN (JGBD), a leveraged ETN that bets against Japanese government bonds. I ended up selling about six weeks later at a modest 2.6% loss, but it’s not the portfolio loss that made this my mea culpa for 2013 but rather the opportunity cost. I could have made a fortune in Japan by playing my cards differently.
Let’s flash back to May. Abenomics has been in effect for about five months, and Japan is starting to see its first flashes of inflation in years. The Fed’s initial tapering comments have turned world debt markets upside down, and Japan’s 10-year bond yield has soared from 0.6% to 1.0% in just weeks.
The moment I had been waiting for appeared to have finally arrived. The bond vigilantes had awoken from their long slumber and had at last come to rout the Japanese bond market. It certainly took them long enough. Japan’s sovereign debts, at 250% of GDP, are the highest in the world, dwarfing those of the U.S. and Europe. And with annual budget deficits at close to 10% of GDP, Japan has been adding to that debt load at a speed that should be alarming to anyone who cared to look.
As already bought 70% of the new bonds issued by the Japanese government . As I wrote in the June issue of Macro Trend Investor, “The way I see it, there are two possibilities here. Either the 10-year sinks back into its long trading range and the day of reckoning is postponed for a while…or things get really choppy really fast.”
Well, as it would turn out, the day of reckoning was indeed postponed. Calm returned to the Japanese bond market, and yields sank back to 0.6%. If I had it to do over again, I would have simply jumped on the macro bandwagon of going long Japanese equities and short the yen. An ETF that essentially follows this strategy– WisdomTree Japan Hedged Equity (DXJ)—is up 52% over the past 12 months.
Live and learn…
Disclosure: Charles Lewis Sizemore, CFA, is the editor of Macro Trend Investor and chief investment officer of the investment firm Sizemore Capital Management.
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