{"id":183319,"date":"2022-12-20T16:20:00","date_gmt":"2022-12-20T21:20:00","guid":{"rendered":"https:\/\/ibkrcampus.com\/traders-insight\/the-widowmaker-pays-off-as-the-last-central-bank-domino-falls\/"},"modified":"2023-02-10T13:30:08","modified_gmt":"2023-02-10T18:30:08","slug":"the-widowmaker-pays-off-as-the-last-central-bank-domino-falls","status":"publish","type":"post","link":"https:\/\/www.interactivebrokers.com\/campus\/traders-insight\/the-widowmaker-pays-off-as-the-last-central-bank-domino-falls\/","title":{"rendered":"The \u201cWidowmaker\u201d Pays Off as the Last Central Bank Domino Falls"},"content":{"rendered":"\n<p class=\"wp-block-paragraph\">In trader parlance, a \u201cwidowmaker\u201d trade is one that can result in catastrophic loss.&nbsp; The most persistent, classic widowmaker trade has been shorting Japanese Government Bonds (JGB) in the hope that the Bank of Japan (BOJ) will be forced to move off its perpetual zero-interest rate policy.&nbsp; After years of holding fast, the BOJ finally blinked last night when they announced that their yield curve control (YCC) policy would expand from +\/-25 basis points to +\/-50 basis points around zero.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">The widowmaker seemed like an obvious layup.\u00a0 For decades, the BOJ had interest rate policies that were generally below those of the rest of the world\u2019s central banks.\u00a0 That left traders with what appeared to be a one-way bet.\u00a0 Interest rates could only rise, so it seemed obvious to short JGBs.\u00a0 Traders love one-way bets that have limited downside and relatively unconstrained upside.\u00a0 Yet the JGB short never truly paid off \u2013 until today.<\/p>\n\n\n\n<h3 class=\"wp-block-heading\" id=\"h-yields-on-10-year-jgbs-quarterly-data-since-1988\"><strong><em>Yields on 10-Year JGBs, Quarterly Data Since 1988<\/em><\/strong><\/h3>\n\n\n\n<figure class=\"wp-block-image size-full\"><img decoding=\"async\" data-src=\"\/campus\/wp-content\/uploads\/sites\/2\/2023\/02\/Picture2-7.png\" alt=\"Yields on 10-Year JGBs, Quarterly Data Since 1988\" class=\"wp-image-170795 lazyload\" src=\"data:image\/svg+xml;base64,PHN2ZyB3aWR0aD0iMSIgaGVpZ2h0PSIxIiB4bWxucz0iaHR0cDovL3d3dy53My5vcmcvMjAwMC9zdmciPjwvc3ZnPg==\" \/><\/figure>\n\n\n\n<p class=\"wp-block-paragraph\"><em>Source: Bloomberg<\/em><\/p>\n\n\n\n<p class=\"wp-block-paragraph\">We can see above that except for brief periods, yields on 10-year JGBs steadily fell.&nbsp; (Remember, bond prices rise as yields fall.)&nbsp; Only very nimble traders made money by shorting JGBs.&nbsp; Those who had long-term short positions generally lost money on what appeared to be a risk-controlled wager.&nbsp; A period of sustained deflation can do that.&nbsp; Hence the widowmaker moniker.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">In and of itself, a 25bp jump in yields shouldn\u2019t be all that significant.&nbsp; But the BOJ move was quite important.&nbsp; They were the last holdout among the cadre of G7 central banks who have been raising rates \u2013 some quite aggressively.&nbsp; When the US dollar was accelerating to multi-year highs against a wide range of other currencies, the yen was a notable victim.&nbsp; The BOJ was able to stabilize the yen\u2019s decline with a large intervention when JPY was about 150, and then benefitted when the dollar retreated from its highs.&nbsp; But the latest YCC move accelerated the yen\u2019s rise quite dramatically, and we see JPY gaining by 5 yen to the dollar to 132 (+3.6%).<\/p>\n\n\n\n<h3 class=\"wp-block-heading\"><strong><em>Japanese Yen (JPY) per US Dollar (USD) \u2013 1-Year Daily Bars<\/em><\/strong><\/h3>\n\n\n\n<figure class=\"wp-block-image size-full\"><img decoding=\"async\" data-src=\"\/campus\/wp-content\/uploads\/sites\/2\/2023\/02\/Picture1-16.png\" alt=\"Japanese Yen (JPY) per US Dollar (USD) \u2013 1-Year Daily Bars\" class=\"wp-image-170794 lazyload\" src=\"data:image\/svg+xml;base64,PHN2ZyB3aWR0aD0iMSIgaGVpZ2h0PSIxIiB4bWxucz0iaHR0cDovL3d3dy53My5vcmcvMjAwMC9zdmciPjwvc3ZnPg==\" \/><\/figure>\n\n\n\n<p class=\"wp-block-paragraph\"><em>Source: Interactive Brokers<\/em><\/p>\n\n\n\n<p class=\"wp-block-paragraph\">One might have suspected that there was a different widowmaker trade in play today.&nbsp; The yen carry trade is a popular one among hedge funds.&nbsp; The trade involves borrowing a low yielding currency \u2013 typically the yen \u2013 and using the proceeds to purchase higher yielding fixed income assets or to finance speculation in equities and other risk assets.&nbsp; In theory, those who had the carry trade on should be getting clobbered with the yen rising dramatically.&nbsp; It is now about 3.8% more expensive to pay back the borrowed yen.&nbsp;<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">That we see a relatively muted response in US equities and bonds \u2013 the former are up and the latter are down modestly \u2013 make it clear that the carry trade is not as impactful today as it might otherwise have been.&nbsp; It implies that the carry trade is not as popular today as many feared overnight.&nbsp; Perhaps many traders took closed their carry trades as the yen bounced off its November lows.&nbsp; Another theory is that hedge funds de-risked into the year-end period and thus missed the negative impact.&nbsp; The BOJ\u2019s move could have had a potentially disastrous effect in a typically low liquidity period.&nbsp; That we can greet such a momentous move with a relative yawn in much of the world is a fairly lucky thing.<\/p>\n","protected":false},"excerpt":{"rendered":"<p>In trader parlance, a \u201cwidowmaker\u201d trade is one that can result in catastrophic loss.  The most persistent, classic widowmaker trade has been shorting Japanese Government Bonds (JGB) in the hope that the Bank of Japan (BOJ) will be forced to move off its perpetual zero-interest rate policy.<\/p>\n","protected":false},"author":4,"featured_media":183322,"comment_status":"closed","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"footnotes":"","jetpack_post_was_ever_published":false},"categories":[4,15,16,14700,18,6,8,9,26,3],"tags":[1944,2417,850,8643,194,186,14308],"contributors-categories":[13576],"class_list":["post-183319","post","type-post","status-publish","format-standard","has-post-thumbnail","category-asia","category-fixed-income","category-forex","category-ibkr-market-insights","category-macro","category-north-america","category-region","category-securities","category-text-articles","category-traders-insight","tag-boj","tag-central-banks","tag-interest-rates","tag-japanese-government-bonds","tag-jpy","tag-usd","tag-widowmaker","contributors-categories-interactive-brokers"],"pp_statuses_selecting_workflow":false,"pp_workflow_action":"current","pp_status_selection":"publish","acf":[],"yoast_head":"<!-- This site is optimized with the Yoast SEO Premium plugin v26.9 (Yoast SEO v28.2) - https:\/\/yoast.com\/product\/yoast-seo-premium-wordpress\/ -->\n<title>The \u201cWidowmaker\u201d Pays Off as the Last Central Bank Domino Falls<\/title>\n<meta name=\"description\" content=\"In trader parlance, a \u201cwidowmaker\u201d trade is one that can result in catastrophic loss. 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The most persistent, classic widowmaker trade has been shorting Japanese Government Bonds (JGB) in the hope that the Bank of Japan (BOJ) will be forced to move off its perpetual zero-interest rate policy.\" \/>\n<meta property=\"og:url\" content=\"https:\/\/www.interactivebrokers.com\/campus\/traders-insight\/the-widowmaker-pays-off-as-the-last-central-bank-domino-falls\/\" \/>\n<meta property=\"og:site_name\" content=\"IBKR Campus US\" \/>\n<meta property=\"article:published_time\" content=\"2022-12-20T21:20:00+00:00\" \/>\n<meta property=\"article:modified_time\" content=\"2023-02-10T18:30:08+00:00\" \/>\n<meta property=\"og:image\" content=\"https:\/\/www.interactivebrokers.com\/campus\/wp-content\/uploads\/sites\/2\/2023\/02\/dominos-falling-featured-img.jpg\" \/>\n\t<meta property=\"og:image:width\" content=\"1000\" \/>\n\t<meta property=\"og:image:height\" content=\"563\" \/>\n\t<meta property=\"og:image:type\" content=\"image\/jpeg\" \/>\n<meta name=\"author\" content=\"Steve 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