By Charles Sizemore, Chief Investment Strategist, The Freeport Society
Japan’s bond market is in free fall…
It’s not headline news in America. But prices for the once-stable 30-year Japanese government bond just plunged 20%.
And yields (which move in the opposite direction to prices) on 20-year and 30-year JGBs (Japanese Government Bonds) are nearing all-time highs as a result.
This comes after an auction for the 20-year with its weakest demand since 1987.
Moves like that aren’t normal in the sleepy world of government bonds. When they happen, it usually means something has gone terribly wrong.
As investors, we need to pay attention.
Then we’ll go over a one-stop-shop hedge to shield your wealth from the coming storm.
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Shocking Collapse
At first glance, yields on JGBs still seem low.
For example, the 30-year JGB yields 3.12% versus a 4.99% yield on the 30-year U.S. Treasury bond.
But Japan has had absurdly low interest rates for decades. It wasn’t all that long ago that the 30-year JGB yielded 0.05%.
As a result, long-term yields have hit all-time highs. (Remember, higher yields mean falling prices and vice versa.)
But the yield on that bond is up 37% in less than five months. Due to some wonky bond math, that means that this bond’s price is down by about 20%.
So, what’s going on?
To answer that, we have to cast our minds back to the 1990s…
After Japan’s stock market bubble burst in 1991, it did what most other countries do. It borrowed ungodly sums of money and spent it on “stimulus” – everything from business subsidies… to cash handouts… to massive “bridge to nowhere” infrastructure projects.
Japan spent trillions of yen it didn’t have, regularly running budget deficits of 7% to 10% of GDP.
This snowballed into a monstrous debt load that is now 250% of GDP, about double the debt load of the U.S.
To finance it all, the Bank of Japan (BoJ) dropped rates to zero – and even below zero – for a while. It also invented quantitative easing (QE). That’s when a central bank creates money out of thin air to buy its own government’s bonds.
Every remarkably stupid thing Washington and the Fed have done, their Japanese counterparts did it first and on a larger scale.
They got away with it for decades because inflation remained low. So, the BoJ could gobble up virtually the entire supply of government bonds by way of QE.
But since inflation came roaring back in 2021, the BoJ suddenly has fewer options. Continuing to allow the government to spend money it doesn’t have by buying its bonds risks further stoking inflation and devaluing the yen.
No rational person would be comfortable lending money for 30 years to a country with Japan’s debt level. So, the market is repricing the bonds, and it’s not pretty.
Is the U.S. Turning Japanese?
Are we seeing a slow-motion version of the same thing in the U.S.?
It’s looking more and more likely.
The 30-year Treasury bond yield has broken through the key 5% level for the second time this week. It’s now hovering near its highest level since January.
The 10-year Treasury yield, at 4.54%, is back to levels that caused turmoil in the markets last month and played a part in forcing President Trump to hit pause on many of his tariffs.
That’s not as bad as what’s going on in Japan. But it’s significant, nevertheless.
Yes, our fiscal position looks better than Japan’s. But that’s not exactly a ringing endorsement. Venezuela’s fiscal position looks better than Japan’s. That doesn’t mean the country’s finances are in good shape.
And the situation in America is getting worse.
Last Friday, Moody’s became the last of the big three credit ratings agencies to strip the U.S. federal government of its pristine Aaa credit rating.
And influential hedge fund manager Ray Dalio warned on social media that the real risk isn’t a U.S. debt default, but rather that the Fed simply prints the money to cover it, crushing the value of the dollar in the process.
Judging from reports, we may get a Japanese debt crisis before we get a true crisis in U.S. debt.
The immediate risk is that Japan’s instability spills across its borders and infects the rest of the globe.
I guess we’ll know soon enough.
Meantime, I’ll continue my mission to make sure you and your fellow Freeport Society readers are protected.
Two Hedges in One
Yesterday, I recommended the STKD 100% Bitcoin and 100% Gold ETF (BTGD) as a one-stop shop for dollar hedges.
I’ll repeat that recommendation today.
Apart from its role as a dollar hedge, gold is also a traditional crisis hedge. And while Bitcoin’s history is a lot shorter, the inspiration for its existence was the 2008 meltdown.
Appalled by the government bailouts of the banking sector in 2008, its pseudonymous creator, Satoshi Nakamoto, launched a digital currency that acted a lot like gold.
Like its precious metal counterpart, Bitcoin’s supply is strictly limited. Also like gold, it takes costly real-world inputs to “mine.”
Just remember that BTGD is a leveraged play on Bitcoin and gold.
For every $1 you invest, the fund seeks to provide $1 exposure to Bitcoin and $1 exposure to gold – effectively creating a 2x exposure.
The means, if gold goes up 10% in a month, and Bitcoin also goes up 10%, the return of BTGD would be about 20% – or the sum of the two.
And if Bitcoin falls 10% and gold also falls 10%, your losses are going to be 20%, not 10%.
So, take that into consideration as you size your position.
To life, liberty, and the pursuit of wealth,
Charles Sizemore
Chief Investment Strategist, The Freeport Society
