Kyle Bass recently gave a presentation at the Delivering Alpha conference. Kyle Bass has been bearish on Japanese bonds for several months. It most likely has been a painful position as the Japanese yen has risen dramatically.
From Bass’ presentation he concluded that Europe was going to experience a “cluster of sovereign defaults, much sooner than people expect.”
Bass highlighted the fact that Italian bonds fell into crisis mode in less than 45 days and it only took “a 100 basis point move in Italy kicked off all the problems.
Bass thought that a similar problem could occur in Japan where a minute move in rates could cause big problems.
It appears that Bass thinks that the catalyst for the Japanese debt crisis would be
a) European defaults. Bass said, “once you start seeing the dominoes start falling (eg – Greece and Italy) the market will start focusing on Japan.” In fact, Bass mentioned that Japanese finance ministers were aware of this eventuality.
b) Bass also noted that the “underlying instrument (Japanese bonds) are the riskiest in the history of the country and the optionality of that bond are the cheapest they have ever been.” He also noted that “Japan spends almost half of their revenue on debt service. So, a minute move can put them literally into check-mate.”
Kyle Bass starts speaking at 3:45