Vanguard and M&G Double Down on Short JGB Positions

Vanguard has intensified its short position in Japanese government bonds (JGBs) as it anticipates the possibility of an additional 50 basis point rate hike by the Bank of Japan (BOJ) by December. This move underscores Vanguard’s confidence in a more aggressive tightening cycle despite market skepticism.

Joining Vanguard in this stance, M&G Investment Management has also been increasing its short position on JGBs while maintaining a bullish outlook on the yen. Meanwhile, RBC BlueBay Asset Management has continued to offload Japan’s 10-year sovereign bonds, signaling a broader divergence among major asset managers regarding Japan’s economic outlook.

These positions stand in stark contrast to the overnight swaps market, which currently reflects only a 29% chance of a rate hike from the BOJ, a significant drop from 63% earlier this month. Moreover, firms like AllianceBernstein have expressed doubt about further rate increases in 2024 unless the yen weakens considerably beyond 160 to the dollar. Should Vanguard, M&G, and BlueBay’s predictions prove accurate, Japan’s tighter monetary policy could further strengthen the yen and lead to a steady rise in JGB yields.

Vanguard and M&G Double Down on Short JGB Positions

Despite BOJ Governor Kazuo Ueda’s indication on July 31 that rates may continue to climb following that day’s hike, market expectations for additional tightening have diminished. A spate of disappointing U.S. economic data has led to a retreat from risky investments, including yen-funded carry trades. Furthermore, remarks from Deputy Governor Shinichi Uchida hinting that the BOJ might avoid rate hikes during periods of market volatility have been interpreted as a dovish signal. The ongoing leadership race within Japan’s ruling party has also muddied the waters for near-term rate hikes.

The sharp shift in rate hike expectations has caused a significant drop in the 10-year JGB yield this month. Nevertheless, Mark Dowding, Chief Investment Officer at BlueBay and a long-time JGB bear remains committed to increasing bearish bets on these bonds, anticipating another rate hike in January.

“The Japan trade has cost us in the past few weeks, but we are under no compulsion to close,” Dowding stated. “The data and news flow support our thesis, so we want to be patient with the position.”

As the trio of investment firms doubles down on their bets for rising shorter-dated JGB yields, they have also entered curve-flattening trades, buying bonds with longer expiries, such as 30 years or more, in anticipation that 10-year yields remain too low. M&G continues to hold a strong position on the yen, which saw a significant rally, trading at 145.78 against the dollar in Tokyo on Monday.

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