SHORT the Land of the Rising Banks
Since the Bank of Japan shocked global markets in December ‘22 by widening the Yield Curve Control trading band on 10Y JGB yields from 0.25% → 0.5%, TOPIX Banks have been on a one-way surge upward. TSE:T17B index rallied +7% on the day of the policy meeting, and +25% within days thereafter. The three Japanese mega banks Mitsubishi UFG (TSE:8306, NYSE:MUFG), Sumitomo Mitsui Financial Group (TSE:8316, NYSE:8316), and Mizuho Financial Group (TSE:8411, NYSE:MFG) are hitting half-decade highs - but this is nonetheless a broad-based and nearly indiscriminate rally within the overall sector, as smaller regional banks participate in the upside.
The fundamental reason for the rally is simply due to the Bank of Japan steepening the previously (and still) pancake-flat yield curve by lifting the ceiling on 10Y yields, while leaving their front-end policy rate at -0.1%. A steeper JGB yield curve “means” more favorable Net Interest Margins (NIM) for these lenders. There have been all sorts of analyst estimates and calculations of just how much of a positive boost to earnings this will be - and perhaps this will indeed come to fruition.
However, the long end of the JGB curve suddenly and sharply rising can be a double-edged samurai sword- while banks may benefit from higher NIM, they are also taking massive unrealized marked-to-market losses on those very JGB holdings.
Meanwhile, the Bank of Japan has kept firm on YCC at their latest January policy meeting. Furthermore, they have been targeting much of their JGB buying (ex the 10Y) at the 2Y ~ 5Y tenors, and JGB 2Y and 5Y yields have been cut in half from recent peaks as a result. TOPIX Banks index, especially Mizuho shares, have been closely correlated to the 5Y JGB yield - particularly since the December 2022 BOJ surprise rally. Yet, while these banks shares’ rallies have paused, they have not followed 5Y JGB yields downward.
The BOJ has (for now) put a halt on an ever-rising / steepening JGB curve- giving banks +25bps (and falling as of this writing) “extra” on the long end for their NIM spread. Also with BOJ policy, there is still a negative policy rate imposed upon these banks.
Earnings for these banks are coming up next week, starting at the beginning of February. There is a LOT of assumed lofty upside of NIM currently priced into these shares. If they don’t at least MEET these expectations (and according to Bloomberg articles, it seems the executives of the big three are less excited than markets are of earnings upside), swift profit taking can ensue.
If they not only fail to meet lofty expectations, but instead report major unrealized losses on their JGB holdings (after taking huge losses on their foreign bond holdings throughout 2022), swift profit taking can ensue.
If swift profit taking ensues, (other/additional) swift profit taking can ensue.
Japan - “land of the rising yields” is now in reversal - with a major dislocation in the otherwise historically lockstep bank shares vs JGB yields. A fundamental reality check from earnings may be what it takes to whack shares back into place.
Note - this is obviously not trading advice - and as I always repeat in my videos:
If you listen to me, you will lose all your money. If you use me as a reverse indicator, you will still somehow lose all your money. And the reason is very simple: I am a very stupid person, and these are very stupid thoughts.
Clear?
So, with that said, here’s what I have been doing (and again, if you wish to apply any of it, please do so if you hate money).
I had been long MUFG since Dec BOJ Meeting to ride the momentum, and closed out my long on Mon Jan 16th (day before Jan BOJ) for a +21% return in something like 15 trading days - and closed out the trade on the thesis of “no change for Jan BOJ meeting” - which then came to fruition, and MUFG fell -5% thereafter.
I am using my gains (“house money”) and am now long puts on these banks with post earnings expiry. Of the three mega banks, I hate Mizuho Financial Group (TSE:8411, NYSE:MFG) the most. And I am FAR from any sort of financial analyst - I am basing this on the JGB 5Y correlation, as well as Mizuho ATM machines having eaten my ATM card TWICE ← prob little to do with stock price action.
The fundamental reason for the rally is simply due to the Bank of Japan steepening the previously (and still) pancake-flat yield curve by lifting the ceiling on 10Y yields, while leaving their front-end policy rate at -0.1%. A steeper JGB yield curve “means” more favorable Net Interest Margins (NIM) for these lenders. There have been all sorts of analyst estimates and calculations of just how much of a positive boost to earnings this will be - and perhaps this will indeed come to fruition.
However, the long end of the JGB curve suddenly and sharply rising can be a double-edged samurai sword- while banks may benefit from higher NIM, they are also taking massive unrealized marked-to-market losses on those very JGB holdings.
Meanwhile, the Bank of Japan has kept firm on YCC at their latest January policy meeting. Furthermore, they have been targeting much of their JGB buying (ex the 10Y) at the 2Y ~ 5Y tenors, and JGB 2Y and 5Y yields have been cut in half from recent peaks as a result. TOPIX Banks index, especially Mizuho shares, have been closely correlated to the 5Y JGB yield - particularly since the December 2022 BOJ surprise rally. Yet, while these banks shares’ rallies have paused, they have not followed 5Y JGB yields downward.
The BOJ has (for now) put a halt on an ever-rising / steepening JGB curve- giving banks +25bps (and falling as of this writing) “extra” on the long end for their NIM spread. Also with BOJ policy, there is still a negative policy rate imposed upon these banks.
Earnings for these banks are coming up next week, starting at the beginning of February. There is a LOT of assumed lofty upside of NIM currently priced into these shares. If they don’t at least MEET these expectations (and according to Bloomberg articles, it seems the executives of the big three are less excited than markets are of earnings upside), swift profit taking can ensue.
If they not only fail to meet lofty expectations, but instead report major unrealized losses on their JGB holdings (after taking huge losses on their foreign bond holdings throughout 2022), swift profit taking can ensue.
If swift profit taking ensues, (other/additional) swift profit taking can ensue.
Japan - “land of the rising yields” is now in reversal - with a major dislocation in the otherwise historically lockstep bank shares vs JGB yields. A fundamental reality check from earnings may be what it takes to whack shares back into place.
Note - this is obviously not trading advice - and as I always repeat in my videos:
If you listen to me, you will lose all your money. If you use me as a reverse indicator, you will still somehow lose all your money. And the reason is very simple: I am a very stupid person, and these are very stupid thoughts.
Clear?
So, with that said, here’s what I have been doing (and again, if you wish to apply any of it, please do so if you hate money).
I had been long MUFG since Dec BOJ Meeting to ride the momentum, and closed out my long on Mon Jan 16th (day before Jan BOJ) for a +21% return in something like 15 trading days - and closed out the trade on the thesis of “no change for Jan BOJ meeting” - which then came to fruition, and MUFG fell -5% thereafter.
I am using my gains (“house money”) and am now long puts on these banks with post earnings expiry. Of the three mega banks, I hate Mizuho Financial Group (TSE:8411, NYSE:MFG) the most. And I am FAR from any sort of financial analyst - I am basing this on the JGB 5Y correlation, as well as Mizuho ATM machines having eaten my ATM card TWICE ← prob little to do with stock price action.
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