Any thoughts on the Japanese yield curve being so flat relative to the US yield curve? The 40 yr auction went for 2.22% last night.

I don't think the market believes that Japan can grow as fast as the US. There is probably more risk premium in the longer end of our curve as well.

vol-trader wrote:I don't think the market believes that Japan can grow as fast as the US. There is probably more risk premium in the longer end of our curve as well.

The question is "why?" Last time I checked, enormous debt to GDP ratios put Japan into a position where they are forced to print and monetize debt. At some point, one would assume this would have an impact on their risk premium and perceived inflation risk. None of this matters, though. This is the same straw man argument that people make about the US' fiscal and monetary position: trillions of mounting debt whereby the Fed is forced to print and buy from the treasury who forced to borrow more to pay back past debts.

Stepping back, it looks like ECB and BOJ monetary policy are taking the free-rider cue from the Fed, and all scrutiny is on the US. But with that, I'm curious what is the general perception of Japanese debt and currency from within Japan -- is there a strong likewise constituent of bond shorts out there? Perhaps some of that US risk premium comes from the fact that the Japanese have honor, and will not so easily default on debt (versus the US). But monetization is the same thing.

By this logic, the Yen in particular is overvalued, especially if their trade surpluses do not return.

I traded JGB for the past year and a half, so I should be able to nail this one but I'm afraid I won't be able to. A few thoughts though. The buyers of the long end are generally lifers and the big national pension fund (they have a huge population of pensioners). They have to buy so they will always be there. That probably contributes to the flatness. The belly is traded more by the Japanese mega banks. The CTAs love to trade the 10yr bond future.

They have been in this for 10 years plus, so they have proven that they aren't at risk of run away inflation. It would be interesting to see how the curve traded as they were entering the lost decade (which would be a better comparison to where we are right now). My guess would be that it took awhile to get the 30 year down to 2pct.

As far as shorts go, there has been a new interest to short recently as the gov't has announced more and more supply.

The yen is way over-valued, but that is a result of the carry trade rather than economic fundamentals.

These are thoughts to get the discussion going. Please feel free to add to them or shoot them out of the water if you see fit!

The JPY curve is flat in the long end for the same reason that the GBP curve is... There's simply not enough supply in the long end to meet the PF demand.

I think, simplistically, that's all there is to it, with the larger macro-economic issues probably playing themselves out through FX. As a result, I would suggest that a significant weakening of yen is a lot more likely than a steepening of the long end.

My Z$2c

In continuation of my general obsession with quantitative easing... Yes, a simplification, but it gets the point across.