Here’s the twist that makes money-losing Japanese bonds pay off "At first blush, most foreign investors would be hard pressed to find a good reason to own a negative-yielding Japanese government bond. And second blush, and third blush. More below! Yet many are piling in. Foreigners’ holdings of Japanese government bonds hit the highest level on record in the third quarter of 2016, at ¥111.9 trillion ($997.9 billion), according to the latest available data from the Bank of Japan.
* * * "[This] is because foreign investors rich in U.S. dollars—like banks, hedge funds and even big asset managers—can charge a lot to swap their greenbacks for yen through an increasingly popular but complex trade. This premium is usually so generous that the trade is still profitable, even if foreign investors end up parking the yen they receive into negative-yielding Japanese assets. Currently, a U.S. investor buying a three-year JGB—and converting it into dollars—would get hit with a yield of about minus-0.187%. However, factoring in the premium they receive of 0.78 percentage point, that investor can still earn a nearly 0.6-percentage-point pickup from doing the swap. With the Federal Reserve expected to raise rates this year, and the Bank of Japan’s policy to keep the yield on the 10-year JGB around zero, the appeal of higher-yielding dollars is likely to persist and this premium could widen, investors and analysts say. “It’s free money,” said Alicia Garcia Herrero, chief economist for Asia-Pacific at French investment bank Natixis. “I just need to have those dollars in my pocket [to do the trade].'" Brilliant. This will work well right up until the Japanese collapse, then everyone holding these assets will get burned bigly. This reminds me of the early days of Internet commerce. There were many sites which advertised free items, or 100% rebates. How they worked is you bought the item for a very high price, often $30-50 per tee shirt, but it came with a 100% rebate. You then downloaded the rebate coupon, mailed it with your receipt to an address, and then about 6 (or even more months later you would get your rebate check). This seemed excessively dangerous to me, although I did buy a few items from one of these sites. The way this worked was the sellers were taking whatever money they were holding short term and placing it into the company, which was growing commonly at 120% or more per year. This meant that the $50 tee shirt over 6 months the total investment grew to $88.58, and the return was $38.58. So, if the tee shirt cost the seller $15 to make or buy, they made $23.58, which they also plowed into the business. The idea was these were money pumps, and the principals in the business were making it big. From an investor perspective, however, I could never figure out how this could continue. This was nothing more than a Ponzi scheme, needing ever more investors to continue driving up the stock price. Once that dynamic ended, the business model was bound to fail. It seem lunatic, but this was a basic Internet stock model at the time, and when the tech markets collapsed in the late 1990s, all of these businesses immediately ceased to exist. One woman lost a couple of hundred thousand dollars in rebates she has floating in one of the businesses. Sad, but she should have expected this. Extraordinary Popular Delusions and The Madness of Crowds by Charles MacKay Anyway, this is the same thing that is happening in these Japanese bond trades. We already know the outcome. Someone will get burned. Hard to feel sorry for these idiot savants. Here are 23 Ancien Regime websites which still work! Just in case you were nostalgic: 23 Ancient Web Sites That Are Still Alive
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