Bass Sees BOJ Bond Purchases Overwhelmed As Investors Dump Debt (May 2013)


Source: Bloomberg – Bass Sees BOJ Bond Purchases Overwhelmed as Investors Dump Debt

Notable excerpts:

J. Kyle Bass, whose Hayman Advisors LP made $500 million amid the U.S. subprime crisis, said the Bank of Japan will have to “dramatically” increase bond-buying efforts that have been “overwhelmed” by investors selling.

Benchmark 10-year Japanese government bond yields rose to 1 percent yesterday for the first time since April 2012, more than triple the all-time low reached last month, a day after the BOJ announced unprecedented bond buying. Japanese shares also plunged the most in two years, trimming gains since November when Shinzo Abe called for expanded fiscal and monetary stimulus before elections that made him prime minister.

“Abe and the BOJ face what I call the ‘rational investor paradox,’” Dallas-based Bass, who has predicted a financial collapse in Japan since 2010, wrote in an e-mailed response to questions. “If JGB investors begin to believe that Abenomics will be successful, they will ‘rationally’ sell JGBs to buy foreign bonds or equities.

BOJ Governor Haruhiko Kuroda said after a board meeting two days ago that excessive bond-market volatility must be avoided and he will adjust debt-buying operations as needed. His board affirmed a policy set on April 4 of expanding the monetary base to fuel 2 percent inflation in two years. JGBs rallied yesterday after the BOJ said it would supply 2 trillion yen ($19.7 billion) in one-year funds to financial markets.

Selling from JGB investors has “overwhelmed the BOJ’s ability to purchase them,” according to Bass. “The BOJ is going to have to dramatically expand its JGB purchasing operation if it is going to be successful in holding back rates.”

Japanese banks, which had been using their excess deposits to buy government bonds, have reduced their holdings as the central bank increases purchases. Lenders had 164 trillion yen of the securities in February, down from a record 171 trillion yen in March last year.

“Everyone that holds JGBs will likely act rationally and sell a portion of their JGBs to buy foreign bonds or domestic equities,” Bass said. “If holders sell a mere 5 percent of their holdings (50 trillion yen), then the BOJ’s new plan isn’t large enough.”

Japan’s debt-servicing costs will rise 100 billion yen for each 10 basis-point increase in yields, Finance Minister Taro Aso said May 16. Yields on Japanese government bonds of all maturities climbed to 0.72 percent on May 22, from 0.4 percent on April 4, the lowest since 2003, according to Bank of America Merrill Lynch data.

The nation’s debt-carrying costs will probably reach a record 23.8 trillion yen to 23.9 trillion yen in the fiscal year starting April 2014, up more than 7 percent from this fiscal year, the Ministry of Finance projected in March. This year’s costs made up 24 percent of the budget. In the U.S., total interest payments of $359 billion accounted for about 10.2 percent of budgetary outlays in the year that ended September, according to Treasury data.

The outstanding debt of the world’s third-largest economy was 991.6 trillion yen at the end of March, a ministry report showed this month. It’s projected to reach 245 percent of gross domestic product this year, according to an International Monetary Fund estimate, the highest ratio in the world.


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