KYLE BASS: On Friday, The Market Gave Us The First Glimpse Of The Japan Blowup

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Kyle Bass, the hedge fund manager who has become the most prominent voice in the market betting on a collapse of Japan's sovereign bond market, was on Bloomberg TV this morning discussing the trade.

It's known as the "widowmaker" because Japan's outsized stock of government debt – the largest in the world as a percentage of GDP – leaves only one conclusion for many traders.

The market has to blow up eventually, right? Except it never does.

Bass has been vocal about his call since 2010. Now, against the backdrop of the monetary policy revolution at the Bank of Japan, which just announced a massive bond buying program, the "widowmaker" trade is back in the spotlight.

Bloomberg TV anchors Erik Schatzker and Stephanie Ruhle pressed Bass to put a timeframe on his call. When exactly does he think the Japanese government bond market is going to blow up?

Bass replied that he wasn't naïve enough to think he could guess when it would happen – but he said that on Friday, we saw the first signs that such an event could be coming.

(On Thursday, the Bank of Japan announced its massive new stimulus program. On Friday, there was a big sell-off in short-dated Japanese government bonds, causing yields to spike. The chart below shows the move.)

Business Insider/Matthew Boesler, data from Bloomberg

Bass told Bloomberg TV:

I think it's important to talk about the BoJ's "shock and awe" campaign, where they are going to double the monetary base by the end of next year, which is unprecedented. They're going to buy roughly 60 trillion yen per year of bonds in the next two years, which is 11 percent of GDP, or their whole fiscal deficit.

This is what I find fascinating in the whole situation. [The Bank of Japan] came out and told you: "The new sheriff is in town, and we've got you." Right? "We're going to buy everything we can buy. Don't worry."

And what happened on Friday? Investors in JGBs panicked. Which is, again, it's really the first diversion from the 20-year norm of their ability to just swallow the numbers and not worry. They actually worried.

According to Bass, this episode illustrates that other market participants are finally coming around to his view on Japanese government bonds.

Bass said in the interview:

You have to think about – you have to get into the heads of the participants, because they all have a collective sense of fatalism.

When you do the quantitative analysis here, you know they are insolvent. Everyone that owns the bonds knows they are insolvent.

It's a question of how long they can hang on. And what changes their views are a multitude of variables...

You never know what sparks the qualitative perceptions of investors to change, but what I saw Friday was it began to change.

I'm not saying it's over today. I'm saying, this is the first deviation of the sanctity of that marketplace. And it was a complete panic on Friday.

The 5-year JGB yield keeps heading higher this week.



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