/biz/ - Business & Finance

Okay so this might be completely retarded, however, I think this also might be the best play in finance. Kinda like a Big Short v2: Tokyo Edition.

The BOJ is artificially suppressing yields by buying an ass load of bonds, to the tune of $80 billion. Unless you're a bigger dove than Lagarde or Kashkari, you know this isn't sustainable. Eventually the BOJ will be forced to capitulate, and the market is betting on it. However, longing the Yen, which is currently sitting at a two decade high with a central bank who's committed to keeping monetary policy loose, carries massive risk, but the bonds don't.

Here’s a quick primer on how bonds work, yield go up, bond go down and vice-versa - that's it. If the BOJ ever decides to let yields rise to more “normal” levels, the price of the bond will fall and the yield will spike. This is what happened in 2016, when the central bank implemented a policy shift known as “yield curve control.” The move caught everyone off guard, and the 10-year yield surged from a record low of minus 0.3% to as high as 0.12% in a matter of days. The price of the bond tumbled 3%.

If you think the BOJ is going to let yields rise in the next few years, you can short the 10-year JGB. The trade is simple: you borrow the bond from someone, sell it, and hope to buy it back at a lower price so you can return it to the owner and pocket the difference. The trade is expensive, with an annual fee of 0.15%, but if yields rise just 0.5 percentage point, you’d make a 20% return. And if yields rise to 1%, the return jumps to 67%.

Of course, if yields don’t rise, you lose money. A lot of money. The 10-year yield has fallen for four straight years, and if it drops below 0.1%, you’d lose 15% of your investment. And if yields stay at current levels for the next 10 years, you’d lose it all.

But here’s the thing: the BOJ is eventually going to have to let yields rise. It’s just a matter of when.

So, the trade is this:

Short the 10-year JGB.