Short JGB futures has asymmetric upside?

Discussion in 'Financial Futures' started by ajensen, Oct 19, 2022.

  1. ajensen

    ajensen

    A Bloomberg article makes me wonder if shorting JGB futures is a trade with asymmetric upside.

    Bond Vigilantes Revive Wagers on a BOJ Hawkish Policy Shift
    * Swaps, corporate bond coupons point to surge in 10-year yields
    * May test governor Kuroda’s determination to stick with policy
    By Ayai Tomisawa and Masaki Kondo
    October 18, 2022 at 6:15 PM EDT, Updated onOctober 19, 2022 at 5:57 AM EDT

     
  2. Ah... the widowmaker.

    GAT
     
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  3. ajensen

    ajensen

    I know the short JGB trade has that reputation, but in general, if a government is suppressing a bond yield or supporting its currency at a certain level, doesn't shorting the bond or currency have asymmetric upside? Of a course a prospective short JGB trader needs to estimate volatility and size the trade accordingly, as discussed in your books, which I have read!
     
  4. M.W.

    M.W.

    Not when the risks are fairly priced. The risk here are extremely deep BOJ pockets, they can go on with this policy for a much longer time than most traders imagine, which BOJ has demonstrated at numerous occasions. Japan domestic sovereign bond ownership is extremely high, most foreign entities in this market are just miniscule players. At some point the policy divergence has to be reconciled with currency positioning but before that many other traders most likely will lose more money on this trade.

     
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  5. Specterx

    Specterx

    The trade certainly has asymmetric upside in the sense of having a better than 1:1 payoff, but whether it's +EV depends on odds and costs/risks.

    Supporting a currency peg is different because such requires the use of potentially scarce FX reserves. Inflation in Japan is currently quite low even with the plunge in JPY, so there's really no significant or immediate pressure on them to change the YCC policy. It's conceivable the BOJ will be forced to change course if JPY keeps tanking and inflation clicks up to 5%+. My play would be to put on the bond short once this latter scenario is actually starting to happen, rather than jumping in now on the hypothetical possibility that it may happen in the future.
     
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  6. ajensen

    ajensen

    Man (a UK money manager) seems mildly bearish on 10-year JGBs:

     
  7. Their flagship AHL fund will be short JGBs, but also short most bonds regardless.

    GAT
     
  8. ZBZB

    ZBZB

    The trade was to short the yen.