No. of Recommendations: 26
Many prognosticators, including Yoda on occasion, keep predicting that the “bond vigilantes” will show up. The theory is that they will NOT purchase government bonds at the current low yields. They will “demand” higher rates as protection against an inflation devalued currency. The bond vigilantes have been eagerly expected in the US since the 2008 credit crisis. So far, they are nowhere to be found.

Japan is an entirely different situation. Their economy has been on the verge of deflation for the last 20 years or so. Recall that the Nikkei 225 peaked at ~ 39,000 back in 1989. It recently closed ~ 13,400. How would you like a NEGATIVE 4.1% compound annual growth rate for the last 24 years? Japan has tried a number of programs to invigorate GDP growth and increase inflation. Recently the Bank of Japan, their equivalent to the Federal Reserve, decided to take strong action to increase inflation. They have explicitly set 2.0% inflation as the target and have started aggressive Quantitative Easing. It remains to be seen if the BOJ will be successful. It is controversial to say the least.

One of the leading US prognosticators of Japan’s economic mess is Kyle Bass. Kyle is one of the hedge funds managers that correctly forecasted the US housing bust. He made a reported $ 1 billion profit betting against housing mortgage bonds. He gained fame and credibility from this one call.

One of Kyle’s major predictions for Japan is that the bond vigilantes will show up and force increased interest rates. Kyle has either been wrong or early on Japan, depending on how you look at it. He has been forecasting Armageddon since at least 2010. He has gotten a lot of press in the last week saying that the Japanese meltdown has begun.

Another prognosticator, Edward Harrison, begs to differ. He posted: Kyle Bass gets is wrong on Japanese bonds. [1]


The Japanese situation is all about policy rates, expected future policy rates, expected inflation and currency depreciation. It’s not about bond vigilantes forcing a sovereign currency issuer to pay extortionate rates on its own currency obligations. Currency revulsion? As I have said time and again, the currency is the release valve. And we are seeing that with Japan as I predicted. The Yen is getting crushed and rates are falling. In Japan, the 5-year is down 10 basis points, the 10-year is down 44 basis points and the 30-year is down 56 bps points in the last year alone! Where’s the stress that Bass points to? He is totally out of paradigm. It’s about policy rates, expected policy rates and inflation. That’s it. The bond vigilante stuff is a myth – just like it is in the UK, by the way.

You might say: “Yoda, why do we care about Japanese bond yields and vigilantes?” The answer is simple. IF and it is a BIG if, bond vigilantes are extinct world wide, it has profound implications for the US. If the BOJ can maintain negative real interest rates in Japan with massive QE, it lends credence to the Fed being able to do the same in the US. It would fall back into the “Financial Repression” theme that I have posted on earlier. [2] The outlook would be many years, to low decades of negative real interest rates. Makes it pretty tough on savers . . .

The Edward Harrison post included the full transcript from a recent Kyle Bass interview, so you can see both sides of the story in one location. If you made Yoda guess, it would be that that bond vigilantes do NOT show up in Japan for many more years. Yoda guesses the same outcome for the US . . .



[1] Edward Harrison blog post: Kyle Bass gets it wrong on Japanese bonds

[2] Yodaorange METAR post on Financial Repression
Print the post  


When Life Gives You Lemons
We all have had hardships and made poor decisions. The important thing is how we respond and grow. Read the story of a Fool who started from nothing, and looks to gain everything.
Contact Us
Contact Customer Service and other Fool departments here.
Work for Fools?
Winner of the Washingtonian great places to work, and Glassdoor #1 Company to Work For 2015! Have access to all of TMF's online and email products for FREE, and be paid for your contributions to TMF! Click the link and start your Fool career.