BlueBay’s biggest macro bet is shorting Tokyo government bonds
TOKYO: RBC BlueBay Asset Management has made selling Japanese government bonds (JGBs) a top wager on expectations the central bank is likely to raise interest rates next week.

“This is the largest macro-risk position we are currently running as it offers the best risk-rewards,” said Mark Dowding, chief investment officer at the fund, which oversees over US$114bil in fixed-income assets. “We are running short JGBs and see real opportunity in the trade.”

RBC BlueBay, a high-profile investor that braved the historically loss-making “widow-maker” trade when Japanese bond yields soared in 2022, is convinced lift off is at hand as inflation sticks at around 2%.

That should help spur policymakers to end the world’s last experiment with sub-zero rates – a move that is likely to catapult local yields higher.

Latest data lend credence to Dowding’s views. Japan’s wage negotiations this month reveal demands for the biggest increases in decades.

Sticky US inflation may also fan jitters of higher-for-longer rates, bolstering the case for the BoJ to tighten policy or risk widening its yawning policy gap with the Federal Reserve.

Central bank officials will decide whether to move this month at next week’s meeting, with the outcome currently too close to call, Bloomberg reported on Tuesday, citing people familiar with the matter.

Dowding sees yields on the previously tightly controlled 10-year bond advancing to above 1.25% by the end of the year, the highest since 2011, from the current level of around 0.77%.

His forecast is more bearish than most, with analyst estimates by Bloomberg showing yields rising to 0.92% in the fourth quarter.

Japan’s 10-year bond yields are currently “supported at levels which are artificially rich,” he said.

Dowding is expressing his bearish Japan bond bets through futures and yen swaps.

It is possible the BoJ could push back its rate hike to April, but rather than the timing, the more interesting aspect will be indications on the future trajectory of rates in the country, he added.

The fund also has a “small” bullish bet on the yen in anticipation of tighter policy.

Japan’s currency is the worst Group of 10 performer, having slid more than 4% this year to around 147.40 per US dollar, extending three-straight years of losses on Japan’s wide interest rate gap with the United States.

“There is a clear sense that the yen is too low,” he said. “Recent meetings give us confidence in an upcoming policy shift by the Bank of Japan. It seems clear that the underlying trend in Japan is one of change.” — Bloomberg
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RBC BlueBay Asset Management has made selling Japanese government bonds (JGBs) a top wager on expectations the central bank is likely to raise interest rates next week.