At the 2009 Value Investing Congress, David Einhorn expressed an ultra pessimistic view on Japanese government bonds. After the earthquake and tsunami it is expected that the reconstruction efforts will cost over $300 billion. Could the reconstruction costs push Japanese government bonds off a cliff?
Greenlight Capital (GLRE) previously bought long-dated options on much higher interest rates in Japan and other developed regions. The options are tied to interest rates four to five years out, Einhorn noted.
During his 2009 presentation at the Value Investing Congress in New York, Einhorn stated, "Japan may already be past the point of no return."
Before the massive earthquake, Japanese public debt was over 200% of GDP. That number is sure to rise as the government will most likely need to nationalize the operator of the stricken Fukushima Daiichi nuclear plant, Tokyo Electric Power Co. (TEPCO).
In 2009, Einhorn noted that at some point Japan could experience a funding crisis where it no longer could borrow at less than 2%.
"When the market refuses to refinance at cheap rates, problems emerge," he said, adding that this could trigger a "currency death spiral."
If one wants to follow David Einhorn's bearish bet against Japanese bonds, how would one go about doing this?
Most retail investors will not have adequate capital to short Japanese government bond futures that have a notional value of $1.7 million.
However, there is another way that retail investors can short Japanese bonds. The SPDR Barclays Capital International Treasury Bonds (BWX) 22.6% of the holdings are in Japanese government bonds. “The investment seeks to replicate as closely as possible, before fees and expenses, the price yield performance of its benchmark index, the Barclays Capital Global Treasury Ex-US Capped index.” The index also has large holdings of Italian bonds and other beleaguered European countries.