The widow-maker
That’s the nickname given to a short Japanese government bond/long JPY trade. It’s been a trade idea that’s gathered pace several times over the past few decades and is built based upon expectations of an inevitable rise in domestic yields from rock-bottom levels. Despite gathering significant coverage amongst the financial press and even market open interest over the years, time and time again the trade has never truly paid out. At the very least the trade is ‘cheap’ given the low cost of borrowing in Japan, affording a speculator holding such a position relatively low hedging/entry costs. However, the often-one-way traffic in JPY and its bonds has led to disappointment for many.
Despite that, could the trade be back on the menu? The catalyst for such a trade to pay off would in most cases be a normalisation of benchmark interest rates in Japan. The Bank of Japan, whose next meeting concludes June 16th, sees an 88% chance of a hike based upon the swaps market. Okay, that might not normalise rates to anywhere near the developed market mean, but it would take rates up to 1%. That’s the highest since the mid-90s. What’s more is that at least one further hike cannot be ruled out in 2026 according to market pricing. We know that authorities in Japan have been intervening to an unprecedented degree in the currency market also.
Authorities depleted some JPY 11.73 trillion in reserves to bolster the local currency in the month to May 27th. At approximately 54.5 billion in real money (GBP), that was not a cheap exercise with USDJPY still approaching the level (160) at which we know Japanese authorities will be considering (if not already undertaking) active market intervention. Could such forces build the case for a resurgence of interest in the so-called widow-maker? With this flow building beneath the spot price, expect volatile/jittery conditions in Yen crosses in the short term.
Discussion and Analysis by Charles Porter
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