JGBS : Bullish and Bearish Analyst Opinions

Rodda states Japanese assets look poised for more downside, citing the risk of the BOJ repeating a past mistake of keeping policy too loose during a supply shock, leading to equity underperformance, bond underperformance, and currency depreciation. Japan is heavily exposed to the energy shock, which is inflationary. If the BOJ looks through this shock and maintains loose policy, history suggests it will result in weak currency (JPY), weak bonds (JGBs), and weak equities (Nikkei). AVOID. The fundamentals suggest a bearish outlook for JPY and JGBs as the energy crisis plays out, with risks skewed to the downside. The BOJ surprises with a decisive hawkish turn to combat inflation, supporting the Yen and JGB yields.

1. THE FACT: The MoF can use its coupon income on its Treasuries creatively and fund some buybacks, and/or realize some of the capital gain on Treasuries bought when the yen was 80. 2. THE BRIDGE: This provides a mechanism for the MoF to support JGBs through buybacks. 3. THE VERDICT: MoF's ability to use Treasury income for JGB buybacks supports a long position.

1. THE FACT: The speaker believes Japan will turn Postbank back into a captive source of demand for JGBs, GPIF will reallocate back into JGBs (at a massive profit), and MoF will reduce its FX reserves relative to GDP. 2. THE BRIDGE: These actions would create demand for JGBs and have a "100% different impact on the yen" (implying strengthening). 3. THE VERDICT: Institutional shifts in Japan will create demand for JGBs and strengthen the JPY.

1. THE FACT: The market is worried about JGBs, potentially due to fiscal concerns or a risk of moving into a "self-reinforcing bad equilibrium." 2. THE BRIDGE: This implies a potential for JGBs to underperform if these concerns materialize, despite Japan's foreign asset position and natural bid from lifers (tweet 4). 3. THE VERDICT: Monitor JGBs for signs of a "bad equilibrium" or increasing fiscal concerns, which could lead to a sell-off.

1. THE FACT: Domestic institutional investors (lifers) are not buying JGBs due to past losses and low rates. GPIF's asset allocation is locked. 2. THE BRIDGE: This suggests a lack of natural domestic demand for JGBs, which could lead to price instability or require other buyers to step in. The market is "worried" (tweet 1). 3. THE VERDICT: Monitor JGBs for potential weakness due to a lack of domestic institutional buying interest.

1. THE FACT: "And there is a bit too much negativity around Japan's fiscal ... real rates are negative at the relevant tenors for funding the government, and the aggregate fiscal deficit (general government, IMF definition) is WAY better than the US ..." 2. THE BRIDGE: The market's negative perception of Japan's fiscal situation is unwarranted given negative real rates and a significantly better fiscal deficit compared to the US. This suggests that JPY and JGBs are undervalued relative to their fiscal fundamentals, presenting a buying opportunity. 3. THE VERDICT: Japan's fiscal situation is better than perceived, with negative real rates and a stronger deficit than the US, supporting JPY and JGBs.

1. THE FACT: "Looks like Japan's Ministry of Finance is getting ready to realize some of its massive profits, selling dollars bought at 80-100 at well over 150 ... and in the process reducing Japan's debt (Japan carries its reserves on the MoF's balance sheet)" 2. THE BRIDGE: The potential for Japan's Ministry of Finance to sell significant dollar reserves (bought at much lower JPY/USD rates) implies a large-scale intervention to strengthen the JPY. This action would also reduce Japan's debt, further supporting the JPY and potentially JGBs. 3. THE VERDICT: Japan's MoF may sell dollars to realize profits and reduce debt, which would strengthen the JPY and potentially JGBs.