Key facts
- Hedge funds are increasing bets on Japanese government bond (JGB) curve flattener trades.
- These trades have resulted in repeated losses over the past two years.
- The front end of the JGB curve experienced an aggressive sell-off starting in late August.
- This sell-off has caused the yield difference between two- and 30-year JGBs to narrow by 25 basis points.
Hedge funds are once again adopting strategies that bet on a flattening of the Japanese government bond (JGB) yield curve, despite experiencing significant losses on similar positions over the past two years. This renewed interest comes after a sharp sell-off in the short-term end of the JGB market since late August. According to a senior rates trader at a US bank in Tokyo, this aggressive selling has compressed the yield differential between two-year and 30-year JGBs by 25 basis points. The strategy is reportedly driven by expectations that Japanese pension funds will repatriate assets, leading to further compression in long-end yields.