Kyle Bass Notes Japan’s Debt Crisis Crash

The much anticipated slip in the Japanese economy hedge fund manager Kyle Bass had been expecting may be here. 

As stocks dive, “flight to quality” didn’t benefit Japanese bonds

In a CNBC interview this morning, Hayman Capital fund manager Kyle Bass noted Friday’s swan dive in the Japanese Nikkei did not produce a corresponding flight to quality in the Japanese bond market, as one might expect.  Japanese bonds “are acting pretty terrible in light of their equity market,” Bass said in the interview.

Kyle Bass: Yen trading higher as Japanese stocks collapsed

Although Bass didn’t discuss it in the video clip, the Japanese Yen has been trading higher.  One would anticipate that if a debt crisis were impacting the Japanese bond market the Asian nation’s currency would see similar fallout.  This hasn’t been the case with the Yen, however.

Will rates or currency implode first?

“Will (the Japanese) lose control of rates, or will they lose control of will the escape valve be the currency?” Bass wondered. A debate inside debt crisis watching circles of trading speculates that the movement of a sovereign currency will be the first clear signs of a debt crisis crash. “We believe the currency will move before the bonds,” Bass said.

In the interview Bass links the recent sell off in US biotech and social media stocks with the Japanese economy.  “The interesting thing in this selloff in the marketplace and in tech … and this huge selloff in Japanese equities, is that the Japanese bond market hasn’t gone anywhere,” Bass said, noting that he expected Japan to see a 2% inflation print. “Yields haven’t collapsed, which is fascinating. So their bonds are acting pretty terribly in the environment of their equity market. So we’ll see what happens.”

Bass has famously bet on the downside of Japan’s “Abenomics,” an aggressive form of quantitative easing that has benefited the stock market in the short term.



About the Author

Mark Melin
Mark Melin is an alternative investment practitioner whose specialty is recognizing a trading program’s strategy and mapping it to a market environment and performance driver. He provides analysis of managed futures investment performance and commentary regarding related managed futures market environment. A portfolio and industry consultant, he was an adjunct instructor in managed futures at Northwestern University / Chicago and has written or edited three books, including High Performance Managed Futures (Wiley 2010) and The Chicago Board of Trade’s Handbook of Futures and Options (McGraw-Hill 2008). Mark was director of the managed futures division at Alaron Trading until they were acquired by Peregrine Financial Group in 2009, where he was a registered associated person (National Futures Association NFA ID#: 0348336). Mark has also worked as a Commodity Trading Advisor himself, trading a short volatility options portfolio across the yield curve, and was an independent consultant to various broker dealers and futures exchanges, including OneChicago, the single stock futures exchange, and the Chicago Board of Trade. He is also Editor, Opalesque Futures Intelligence and Editor, Opalesque Futures Strategies. - Contact: Mmelin(at)valuewalk.com