China Plows Into Absurd Bet on Long-Term Japanese Debt

11-Jun-2011

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An eternal optimist, Liu-Yue built two social enterprises to help make the world a better place. Liu-Yue co-founded Oxstones Investment Club a searchable content platform and business tools for knowledge sharing and financial education. Oxstones.com also provides investors with direct access to U.S. commercial real estate opportunities and other alternative investments. In addition, Liu-Yue also co-founded Cute Brands a cause-oriented character brand management and brand licensing company that creates social awareness on global issues and societal challenges through character creations. Prior to his entrepreneurial endeavors, Liu-Yue worked as an Executive Associate at M&T Bank in the Structured Real Estate Finance Group where he worked with senior management on multiple bank-wide risk management projects. He also had a dual role as a commercial banker advising UHNWIs and family offices on investments, credit, and banking needs while focused on residential CRE, infrastructure development, and affordable housing projects. Prior to M&T, he held a number of positions in Latin American equities and bonds investment groups at SBC Warburg Dillon Read (Swiss Bank), OFFITBANK (the wealth management division of Wachovia Bank), and in small cap equities at Steinberg Priest Capital Management (family office). Liu-Yue has an MBA specializing in investment management and strategy from Georgetown University and a Bachelor of Science in Finance and Marketing from Stern School of Business at NYU. He also completed graduate studies in international management at the University of Oxford, Trinity College.

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By Mike “Mish” Shedlock, globaleconomicanalysis.blogspot.com

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.

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.

$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%.

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.

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