China Plows Into Absurd Bet on Long-Term Japanese Debt

,
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.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List

0 comments to “China Plows Into Absurd Bet on Long-Term Japanese Debt”

Post a comment

Pages (38)1234 Next

Popular entries

  • Kool-Aid at Toll Brothers... Economics reading: On December 5th Toll Brothers reported 4th Quarter Earnings and the results were not exactly...
  • Maxed Out... Economics reading: Are we about to see a trend reversal in reality television shows from the likes of Flip This House...
  • A Lit Fuse in Key West... Economics reading: I have a new set of posts from a friend living (and renting) in Key West who posts on my board on...
  • World Trade Progress... Economics reading: Reuters is reporting Brown, Paulson call for WTO progress.I must note that Mish has been calling...
  • An email from Bernanke... Economics reading: I was quite surprised to wake up this morning and find an Email from Ben Bernanke sitting in my...
 

Economics reading © 2011 - China Plows Into Absurd Bet on Long-Term Japanese Debt