Japan’s Bond Sell-Off a Warning to Global Debt Markets

When someone is selling, someone else better be buying and Japan’s bond market is finding that out with the latest sell-offs in the country’s debt market. Per a Bloomberg report, Japan’s bond futures have fallen by the most since 2016, which caused margin calls for investors following the country’s worst 10-year debt auction in three years—a possible alarm for bond markets around the globe?

“This is a prime example of the unintended consequences of public policy,” said Murray Gunn, Head of Global Research at Elliott Wave International. “Central banks’ policies of quantitative easing mean that everyone knows there is really only one buyer of bonds in town. When that buyer steps aside, liquidity becomes non-existent.”

“Advocates of socionomics understand that policies such as QE are flawed from the beginning because such policies incorrectly assume a body such as a central bank can control the free market,” Gunn added. “The irony is that the Japanese incident might encourage central banks to double-down on this, ultimately doomed, policy.”

Without Japan’s government stepping in to buy the bonds, liquidity is at risk as more sellers look to the exits, but the doors are proverbially shut.

“Japanese government bonds have slumped recently because the government looks to be easing on its bond buying program,” said Jason Lambert, President, CEO and Portfolio Manager of Northwest Financial & Tax Solutions. “So, if I were an investor in Japan I wouldn’t want to be buying their bonds knowing that a major buyer of bonds wasn’t intending on buying as much anymore. Any business would do this. If you sold popsicles for a living, and you know that your largest popsicle buyer wasn’t going to be buying as much from you, I wouldn’t carry around a bunch of popsicles to just watch them melt. It appears to me that Japan is steepening their yield curve. “

Will a global liquidity crisis spill over into sell-offs in equities? Investors can play this hunch with relative value ETFs focusing on U.S. equities and international equities.

For investors looking for continued upside in U.S. equities over international equities, the Direxion FTSE Russell US Over International ETF (NYSEArca: RWUI) offers them the ability to benefit not only from domestic U.S. markets potentially performing well, but from their outperformance compared to international markets.

Conversely, if investors believe that international markets will outperform U.S. domestic markets, the Direxion FTSE International Over US ETF (NYSEArca: RWIU) provides a means to not only see international markets perform well, but a way to capitalize on their outperformance compared to the U.S. markets.

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