JGB experiment

Japanese Government Bonds (JGBs) have quietly become the center of attention on global markets. While the Swiss government bonds offer negative yield, JGBs yields are going parabolic as you can see in the chart below. This is despite the fact that the a bank of a Japan owns 53% of all the government bonds outstanding. But it appears they are on a free market price discovery phase, and in this instance they’re not intervening as a marginal buyer. Let’s do simple math: a 40 yr bond with a 2.2% coupon yielding 3.3% has a duration of 23 years. On Jan 2024 the yield was 1.5%. If a bank (including the BoJ), Insurance company or an investor had those bonds at the time and still holds them, the mark to market losses are 23*1.8%=41.4%. On top of that, interest expense on the whole curve is skyrocketing, which paired with a 250% debt to GDP ratio is a time bomb. Can that spread out to the west? The answer is yes. Japan is currently the biggest U.S. treasury holder with north of $1.1Tn. If Japan starts selling U.S. Treasuries to cover part of the $7Tn debt problem (the total USD value of outstanding JGBs), the U.S. will suffer similar pain. We’re the Guinea pigs of several Trillion dollars financial experiment.

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