Monday, May 13, 2013

The Tremor that nobody seems to take seriously...

Meanwhile, in one of the more important sovereing credit markets, the Japanese Government Bond, volatility has started to explode (at least relative to its historical norms).
Since years, the JGB has been trending up or remained pretty stable, with some upside levitation despite Japan's 200% Debt-to-GDP ratio. Low-volatitlity markets that exhibit an upside bias tend to attract larger and larger positions from computer-based trendfollowing funds, as these funds' allocations are often based on a combination of trend and volatility.

Once fundamentally driven investors start to take their profits (as is happening now) volatility starts to pick up a bit and the trends could start to break down.  Therefore, such activity will be followed by reinforced selling by computer-driven futures funds. 

I believe this is what is happening now in the JGB, and I also believe that this could just be the beginning of a huge move. 

Admittedly, this is currently only a tremor, but could it become the famous flapping of the butterfly's wings?

If this bond market (which has in implicit central bank guarantee) starts to slide, my guess is it will spill over into the confidence of other, allegedly "guaranteed" and complacent bond markets, causing them to unwind some of their excess.

This, in turn, could question the entire current investment equation of ultra-low long term interest rates, which seem to be one factor in the ever rising and extraordinarily calm equity markets.

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