China Plows Into Absurd Bet on Long-Term Japanese Debt
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Bloomberg reports China’s Net Purchases of Japan’s Long-Term Debt Rises to Record in April
China’s net purchases of Japan’s long-term debt reached a record as the larger nation seeks to diversify the world’s biggest currency reserves.$16.6 billion is peanuts to China, but the trade itself is ridiculous. 10-Year Japanese debt is yielding 1.2%. 30-year Japanese debt yields 2.2%.
China bought a net 1.33 trillion yen ($16.6 billion) in Japanese long-term bonds in April, the biggest amount since records began in January 2005, according to data released today in Tokyo by Japan’s Ministry of Finance. The nation sold a net 1.47 trillion yen of short-term debt, the data shows.
“As China tries to diversify its assets with its huge foreign-exchange reserves, it probably wants to have yen- denominated assets to some extent” in the longer term, said Tetsuya Inoue, chief researcher for financial markets for Tokyo- based Nomura Research Institute Ltd. “China has a strong trading relationship with Japan.”
Japanese government debt due in 10 years and longer has handed investors a 2.2 percent gain since the start of April, versus a 1 percent advance for the broad market, based on Bank of America Merrill Lynch data. The Nikkei 225 Stock Average has fallen 2.9 percent over the same period.
Pray tell what is the upside? Is 10-year debt falling to zero%?
Bear in mind that nations do not enter trades on a profit-loss basis so losses are of no concern. However, why take risks for almost no chance of gain when there are huge risks of losses, especially when there is a more viable play.
Buying long-term Japanese bonds is a heads you break even, tails you lose your ass bet. One can lose twice if yields rise and the Yen sinks. It is a sure loser if yields rise substantially, even if the Yen appreciates.
Holding Yen straight-up at least has a chance. I do care for that play, but perhaps I am wrong.
So what is China thinking? The answer is they aren't thinking.
Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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