japan debt
Fingers point at hedge funds after Japan’s bond sell-off
Trend-following investors switched bets after price crossed key threshold
LAURENCE FLETCHER AND TOMMY STUBBINGTON — LONDON LEO LEWIS — TOKYO
Hedge funds are taking the blame for a drop in Japanese government bonds that has reverberated around global debt markets.
Benchmark bonds in the US, Germany and the UK have all taken a tumble in recent weeks, driven by an unusual outbreak of optimism about the global economic outlook that has boosted equities.
But some analysts think the shifts in Japan’s typically tranquil government bond market bear the fingerprints of trend-seeking computerised hedge funds scrambling to cover losses — rekindling a debate about the influence of these market participants.
“Futures-driven selling has been the main cause of the move,” said Peter Chatwell at Japan’s Mizuho International. “It looks like an unwind of leveraged long positions.”
Massive holdings of Japanese government bonds (JGBs) at the country’s central bank mean that the market rarely budges, but the 10-year benchmark yield leapt this week to a high of minus 0.02 per cent, from minus 0.19 per cent at the start of November — a large pick-up, by this market’s standards, that reflects falling prices. The yield slipped back to minus 0.08 per cent yesterday.
So-called commodities trading advisers (CTAs), which try to latch on to trends in global markets, have been betting on rising JGB prices since around this time last year, according to Société Générale’s Trend Indicator, with great success. But many were hit as the market went into reverse in early September, and started suffering losses. The Trend Indicator has, as of late last week, shifted to betting on falling prices.
The global pullback in fixed income since mid-September has been sparked by easing trade tensions and a sense that the gloom about the prospects for the world economy was overdone.
Selling in JGBs — which also reflects receding expectations that the Bank of Japan is on the brink of cutting interest rates — has been a catalyst for broader moves at crucial points during the sell-off, including over the past week, according to Jim McCormick at NatWest Markets.
“CTAs have built in some cases record long positions in core fixed income markets,” Mr McCormick said. “With momentum signals now turning less bullish, positions could be set to follow.”
Bond traders and analysts in Tokyo point out that CTAs had built huge net long exposure to Japanese bonds by the end of August. Those positions, said analysts at Nomura, were highly leveraged and prone to sharper moves in the weeks and months that followed.
Some analysts calculate that the key point for many of those funds in 10-year yields was minus 0.11 per cent. Once the yields popped above that level in November, many funds that had bought the bonds in August’s rush were left holding losses, turning them into automatic sellers.
Critics say these funds, which run about $300bn in assets, push markets further than they otherwise would have moved, damaging other market participants. But many managers of CTAs say the amount they trade is only a fraction of total market volume and their footprint is small.
And while these managers have sold JGBs, the extent to which they are now betting on falling prices varies. The bonds are “not a big short”, said an executive at one hedge fund.
Rotterdam-based hedge fund Trans-trend, which manages $5.4bn in assets, owned JGBs for most of this year, making money in the process, but started cutting this position late last month. Rather than betting on falling prices, the fund now has no exposure.
“We do not believe that Transtrend has played a significant role in exacerbating the safe haven or JGB trend,” said executive director André Honig. “For the CTA sector as a whole, it shouldn’t be the case either.”
CTAs employ teams of PhD scientists to design algorithms to spot and profit from market trends, and they have been enthusiastic buyers of bonds on very low or negative yields in recent years.
While many human hedge fund traders and other investors have recoiled at the prospect of effectively paying for the privilege of lending money to a government, quants, which feel no fear, kept holding on as the trend took yields into the deep freeze.
That has been a big driver of CTAs’ gains this year. Such funds are on average up 6.2 per cent this year to the end of October, according to data group HFR, despite suffering some losses in recent months as bonds weakened.
London-based Aspect Capital has gained 18.5 per cent this year in its main fund. It has been betting on rising bond prices, according to an investor letter seen by the Financial Times, and suffered a loss on its bond position in early November. The letter did not detail which countries’ bonds Aspect owned. Aspect declined to comment.
Mr Chatwell said the swings in the market had undermined bond-buying strategies in recent weeks. He said: “While there’s all this volatility it’s harder to generate income from the JGB market. A lot of investors are sitting on the sidelines and waiting for a better entry point.”
Quants, which feel no fear, kept holding on as the trend took yields into the deep freeze
Sterling edged up to its highest level in a week after a poll showed Boris Johnson’s Tory party could storm to its strongest election victory since Margaret Thatcher more than three decades ago. The modest rally marks a shift in tone for the currency markets; In recent months, the pound has at times reacted positively to gains by Jeremy Corbyn, with investors betting that despite his market-unfriendly policies, the opposition leader at one point seemed to offer the clearest path away from leaving the EU without a deal. Now, Conservative gains are linked more closely to strength in the pound. The currency hit a peak of $1.2950 in late New York trading on Wednesday as investors reacted to the YouGov poll. It gave up those gains in London, but analysts said the initial jolt higher highlighted how market sentiment had switched. Antje Praefcke, an analyst at Commerzbank, said: “A result like [the one forecast by the poll] in two weeks’ time would mean that Boris Johnson would be able to get his Brexit agreement through parliament at the end of January and would be able to start the negotiations on future EU relations following the exit. “Even if this would cast the exit of the UK out of the EU in stone it would at least end the uncertainty about it that dominated the past months and years.” The UK currency has inched up and down throughout the election campaign that began in early November as traders have attempted to divine what various outcomes would imply for Brexit and the economy more broadly. Mr Johnson’s Tories have led in opinion polling ever since the campaign kicked off. But investors have closely scrutinised the latest YouGov poll, based on a sample of 100,000 people, because it was the only one to correctly predict a hung parliament in 2017. A Conservative majority is seen by many analysts as a bullish outcome for the pound since it would herald more certainty — at least in the short term — over the path for Brexit. Traders worry that an indecisive result or a Labour win would present fresh hurdles to the passage of legislation to allow the UK to exit the EU with a transition agreement in place. Derek Halpenny, head of research for global markets at MUFG in London, said: “Corbyn has had a bad campaign and while there is still scope for the gap to narrow, it is now looking increasingly likely that time is running out or has run out for Labour to make a surge.” The pound has rallied 8 per cent since striking a trough below $1.20 against the US dollar in August, leaving it as the best-performing major currency over the past three months. Analysts and investors have said the rise has come due to a reduction of concerns over a potentially chaotic no-deal Brexit that dominated the headlines this summer. Despite the recent rise the pound is, in effect, flat for 2019. The December 12 election will set its tone for the coming weeks and months. Goldman Sachs, for instance, forecast last week that the pound might rise to $1.35 if the Tories secure a majority since it would speed up the Brexit process.
Sterling edged up to its highest level in a week after a poll showed Boris Johnson’s Tory party could storm to its strongest election victory since Margaret Thatcher more than three decades ago. The modest rally marks a shift in tone for the currency markets; In recent months, the pound has at times reacted positively to gains by Jeremy Corbyn, with investors betting that despite his market-unfriendly policies, the opposition leader at one point seemed to offer the clearest path away from leaving the EU without a deal. Now, Conservative gains are linked more closely to strength in the pound. The currency hit a peak of $1.2950 in late New York trading on Wednesday as investors reacted to the YouGov poll. It gave up those gains in London, but analysts said the initial jolt higher highlighted how market sentiment had switched. Antje Praefcke, an analyst at Commerzbank, said: “A result like [the one forecast by the poll] in two weeks’ time would mean that Boris Johnson would be able to get his Brexit agreement through parliament at the end of January and would be able to start the negotiations on future EU relations following the exit. “Even if this would cast the exit of the UK out of the EU in stone it would at least end the uncertainty about it that dominated the past months and years.” The UK currency has inched up and down throughout the election campaign that began in early November as traders have attempted to divine what various outcomes would imply for Brexit and the economy more broadly. Mr Johnson’s Tories have led in opinion polling ever since the campaign kicked off. But investors have closely scrutinised the latest YouGov poll, based on a sample of 100,000 people, because it was the only one to correctly predict a hung parliament in 2017. A Conservative majority is seen by many analysts as a bullish outcome for the pound since it would herald more certainty — at least in the short term — over the path for Brexit. Traders worry that an indecisive result or a Labour win would present fresh hurdles to the passage of legislation to allow the UK to exit the EU with a transition agreement in place. Derek Halpenny, head of research for global markets at MUFG in London, said: “Corbyn has had a bad campaign and while there is still scope for the gap to narrow, it is now looking increasingly likely that time is running out or has run out for Labour to make a surge.” The pound has rallied 8 per cent since striking a trough below $1.20 against the US dollar in August, leaving it as the best-performing major currency over the past three months. Analysts and investors have said the rise has come due to a reduction of concerns over a potentially chaotic no-deal Brexit that dominated the headlines this summer. Despite the recent rise the pound is, in effect, flat for 2019. The December 12 election will set its tone for the coming weeks and months. Goldman Sachs, for instance, forecast last week that the pound might rise to $1.35 if the Tories secure a majority since it would speed up the Brexit process.
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