The tragic events unfolding in Japan, with economic costs still yet to be fully comprehended, are putting immense pressure on its economy, in particular its massive debt burden.
The tragic events unfolding in Japan, with economic costs still yet to be fully comprehended, are putting immense pressure on its economy, in particular its massive debt burden. And for those hedge fund managers who have long been bearish, last week’s earthquake and unfolding nuclear emergency is providing a very unfortunate opportunity to make money. As reported in the Wall Street Journal this week, hedge funds such as Hayman Advisors and Commonwealth Opportunity Capital are seeing their long-held bets on Japan’s government and corporate bonds coming to fruition. The cost of buying credit default swaps on JGBs has spiked with five-year swaps on Japan having increased 12 basis points to 119.5 basis points, according to Citigroup Inc. The cost of protecting corporate debt has also climbed 7.5 basis points to 147.5 basis points (based on Markit iTraxx Japan index). One of the biggest CDS moves has been in debt held by Tokyo Electric Power Co, owners of the stricken nuclear power plant: the annual cost of insuring USD10million of its debt climbed six-fold from USD40,700 last Friday to USD240,000 on Monday. This has helped Commonwealth Opportunity Capital, an LA-based hedge fund, make millions on an initial investment of less than USD200,000. Co-CIO Adam Fisher said that whilst nobody wanted bad things to happen to people it showed how fragile Japan’s highly levered economy was. Hayman Advisor’s Kyle Bass and others are bearish on the yen and JGBs, buying options contracts that will potentially profit from rising volatility in Japan’s debt and currency markets. Since last week’s events the Nikkei 225 Index has fallen sharply from 10589.50 last Wednesday to 9093 as of yesterday: a 14 per cent drop.
