Episode summary
Japan Bond Meltdown Sends Yields to Record High
Bloomberg Surveillance
· · Guests: Michael Purves
Summary
Japan’s bond market selloff is being treated as more than a local event: Michael Purves argues that surging Japanese yields are importing rate volatility into the global fixed-income market and adding subtle pressure to U.S. Treasuries. He points to the 40-year Japanese bond’s move as evidence that stress is building, while noting that U.S. rate volatility has otherwise been unusually low despite heavy attention on the Fed and inflation.
Purves says the global bond market is tightly connected, so higher Japanese and European yields can lift the U.S. back end even if they do not directly force the 10-year Treasury to 4.75%. He also argues that the current U.S. steepening reflects sticky inflation, still-resilient growth, and the fact that the Fed has been cutting into a decent economy rather than a slowdown.
On positioning, he says clients are buying risk but are also very focused on protection after a strong multi-year run. In equities, he argues the low-correlation environment makes stock selection more important and makes traditional hedges like VIX calls less effective, while gold remains his preferred hedge for geopolitical shocks. He also sees diversification outside the U.S., especially in Europe, as a potentially strong opportunity if fiscal stimulus turns into action.
Key takeaways
- Purves says Japan’s bond rout is “importing a little bit of rate volatility” into global markets and creating subtle upward pressure on U.S. Treasuries.
- He doubts Japan alone will push the U.S. 10-year to 4.75%, but says it can reinforce higher Treasury valuations and a stickier back end.
- Purves argues the U.S. curve is steepening because the Fed has been cutting into solid growth, low unemployment, and still-resilient inflation.
- He says equity clients are still buying risk, but they are increasingly focused on protecting gains after three strong years.
- Purves says low cross-stock correlations make stock picking more important and make VIX-based hedges less useful than gold for geopolitical risk.
- He sees opportunity in European equities if stimulus becomes real policy action, and says diversification outside the U.S. has already paid off over the past year.
Notable quotes
“I think what's really idiosyncratic with Japan right now is the fact that their 30 year bond is, as you know, that yields are surging”
“I think you're seeing a little bit of it. It matters a little bit right now to the global bond market”
“We import and export interest rates just like other other countries do. It is a one big global bond market”
“I think there's this thing about, you know, the term premium or, you know, the steepen or, if you will, you know, being sort of higher, sticky, higher, longer”
“They're buying risk, but they're very much if you're an equity fund, long, short or long, only you are you are a stock picker right now more than ever”
How the episode opens
I think what's really idiosyncratic with Japan right now is the fact that their 30 year bond is, as you know, that yields are surging. Right. And it's an interesting contrast because in the United States, for all the time we talk about the Fed, the chair, inflation and all this interest rate stuff, The the reality is, is that rate volatility in the U.S.
has been extraordinarily low. Perhaps until last night there and great volatility overseas. Right.
Do it in Japan particularly is doing very interesting things. I think. So what's happening is that we're kind of importing a little bit of rate volatility from Japan right now.
Oh, I got to depress purpose here. Yes. You know, got a story, to be honest.
So I took the 40 year piece in Japan quoted in yield. I figured it out in price. And I looked at a standard deviation study.
And you and I know the four standard deviations is where things get exciting. The price is gone 90 something to 83 and for standard deviations is only one point more from 83 to 82 really begins to show the stress. Yeah.
Does that matter to the global bond market that we're coming up on a four standard deviation move in some of the stuff? Well, I think you're seeing a little bit of it. It matters a little bit right now to the global bond market.
You know, it's funny, if you look at calculations of the term premium rate for you for for several years, that was that that term premium for the U.S. Treasuries was extraordinarily low. At the same time, the Japanese and European yields were in negative territory.
Now this now there's no more negative yielding debt. That's been the condition for a while now.
From the episode’s captions: roughly the first two minutes, lightly cleaned. Keep watching on YouTube →
Topics
- japan bond meltdown
- jgb yields
- yen intervention
- japanese fiscal policy
- risk-off sentiment
Companies and tickers mentioned
- Tallbacken Capital Advisors
- NLI Research Institute
Watch the episode
Watch “Japan Bond Meltdown Sends Yields to Record High” on YouTube
Summary, takeaways and quote selection by Octagon. Quotes are short excerpts; the full conversation is in the episode.
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