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I read about their JGB position in a Reuters article. Barron, do you feel that even if they unwind a large part of their position at a very very slow rate, would there be enough of a market impact to make a short profitable?
Edit:
http://www.reuters.com/article/bonds...T8013120070928
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yes. and i don't think it will take anywhere near 10 years to do this.
the timing of it is obviously key, but overall there is definitely room for a short here.
what do you think is a very very slow rate? 115million yen/day ($1million dollars)? that would be about 28billion yen or 250million dollars per year. that is slow and it would still have an impact, though extremely small.
of course they will try to minimze the impact. and the JGB market (apparantly at $5.3 trillion dollars mkt cap) can withstand a few billion here or there without an impact...
1 billion/day would be 250billion/year. that isn't "slow" but isn't very fast either and that would make a sizeable impact...
but at even 1 billion/day it would take 4.48 years to unload the whole, and 2.24 years to unload half of it. asnoted, that would be felt as it is about 5% of the entire JGB market.
the plus side to this trade though is that if i'm wrong, what is the worst case scenario? US slows precipitously, import demand falls, china has some random sudden slowdown, demand for japanese exports fall, prices start falling again, and the central bank does what? cut rates 25 or at most obviously 50bps. that would probably happen some insignificantly small % of the time (rates falling by >25bps). and when it does, you have a moderate (though still painful) loss.
if i'm right, the impact will be significant (i don't know the equivalent bp comparison here).
so the loss isn't that big in most cases and isn't even tremendous inthe worst case, while the gain is steady and medium sized in most cases and decently big (40% flow in a year) in the best case (very unlikely though as that would be about 1.8billion/day selling of JGBs)
it isn't the trade of the year or anything, and it's information ratio isn't big (since JGBs are so freaking volatile), but i think it would be worth it.
Barron