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JGB Yields: From ALL Time Low to 1-Year High

There’s a more objective explanation for what happened than what you've read in the news

by Nico Isaac
Updated: March 01, 2017

If you've been following Japan's sovereign debt market over the last year, chances are, you're wearing a neck brace due to the sector's whiplash-inducing moves.

If you're just returning from a year-long sabbatical, allow me to bring you up to speed.

Back in mid-2016, the "land of the rising sun" was the "land of the plunging yields," as yields across the entire Japanese government bond market were at an all-time low, below .1%.

And, according to mainstream wisdom, this trend was not about to go anywhere anytime soon.

The reason being: The world, as we knew it, was widely expected to end, care of several destabilizing factors, such as:

  • The post-Brexit reign of chaos
  • The intense anxiety surrounding Trump's nomination for U.S. President
  • The Bank of Japan's decision to push interest rates below zero

Add them all up, and you've got a perfect "negative feedback loop," said one news source at the time:

"Japanese government bonds are caught in a self-propagating spiral that could soon see yields on every maturity below zero.

'Only God knows how far yields will fall.'" (June 29 Bloomberg)

So, what happened?

Well, yields when in the complete opposite direction, starting in late July. Yes, the JGB yield started soaring!

Now, before you say YCP, let me stop you. The popular theory suggesting the JGB yield rally was the result of the Bank of Japan's highly-controversial "Yield Curve Policy" (YCP) -- whereby they promised to do whatever it takes to keep yields in a supportive posture -- doesn't fly.

The reason why: The Yield Curve Policy was announced on September 20 -- two months AFTER the JGB yield started rising.

At the beginning of the JGB yield's shocking reversal, however, it was our July 31 Asian Short Term Update that suggested the market's stunning move to record highs (in prices; lows in yields) was coming to an end.

And no, we didn't have the omnipotence of God to know how far yields would fall. We simply had the objectivity of a clear, five-wave Elliott wave pattern. See the idealized diagram below:

Our July 31 Asian Short Term Update identified this five-wave structure on the price chart of Japanese government bond futures and wrote:

"We haven't looked at Japanese Government bond futures (JGBs) in some time. Friday's large decline occurred after the JGBs made a new all-time high on Thursday. The Elliott wave count here is quite clean. A very nice Minor wave 4 triangle this spring gave way to a five-wave rally that is now finished.

"Look for JGBs to continue lower towards the previous fourth-wave low and lower weekly Keltner channel in the 151-151.5 area."

The next chart summarizes what followed.

From their July peak, JGB prices turned down from their record highs (yields turned down from their record lows) and embarked on a swift and powerful reversal to one-year lows.

In fact, JGB yields touched a one-year high in late January.

Since January, JGB yields have recommitted to the upside in a strong surge.

Right now, our February 28 Asian Short Term Update's video and written analysis of Japanese government bond futures shows prices on the cusp of another major "breakthrough."

This one that could be the "fuel for a bigger" move in Japanese bonds -- and perhaps bond markets around the world.

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