Money and Finance

Doom Heralded at Hayman by Widening Trade Deficit: Japan Credit

Thanks to Will for passing this along.

Going back and reviewing an investor letterfrom Kyle Bass dated November 30, 2011, Bass wrote “We believe that Japan would have a bond crisis of its own within the next two years without the current European debt crisis. The European debt crisis will simply act as an accelerant to the Japanese situation as it will most likely change the qualitative thoughts of JGB investors. We believe that this sequence of events is set to begin in the next few months (beginning with defaults in Europe).”

So maybe central bank intervention delayed the “next few months” part, but it appears their thesis (of which there is more detail HERE) remains intact.

Japan’s worsening trade gap will make it harder to service the world’s largest debt, fulfilling part of the doomsday scenario that Hayman Capital Management LP is betting on.

The nation’s 10-year note yield may rise toward 10 percent from the world’s third-lowest of 0.79 percent, while the yen weakens, said Richard Howard, who oversees Dallas, Texas-based Hayman’s Japan-focused fund with J. Kyle Bass. That would represent the developed world’s second-highest borrowing costs after Greece, and a surge to that level by the end of 2013 would cause losses of 42 percent for investors purchasing the securities now, data compiled by Bloomberg show.

Data yesterday showed Japan had its biggest half-year trade deficit on record. Hayman, which manages about $1 billion, made $500 million by predicting the U.S. housing market collapse, and Bass has said since at least 2010 that Japan’s $12 trillion bond market is heading for a crash. So far, the debt has returned 3.1 percent in the past two years, Bank of America Merrill Lynch data show, while yields touched nine-year lows.

“It all came down to this idea that there was an internal self-funding mechanism in Japan, that essentially the Japanese economy and interest-rate environment could exist separate to the rest of the world,” Howard, 32, said in an Oct. 18 interview in Singapore. “It wasn’t going to last forever, and in fact it is rapidly approaching a turning point.”

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