'Market Overreaction' to Takaichi's LDP Win, Brandywine Global Says

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00:00Let's talk about the direction of the Japanese yen then, because we have, of course,

00:04seen it sitting around that 150 mark. Do you see that being a sustained reaction in the currency?

00:10I think there's definitely some more room to sell off. But at the same time,

00:18I think this might be an overreaction. So on the first day of the victory of the election,

00:24I think the market overreact. I don't think the new prime minister will actually deliver

00:32the expansionary fiscal policy or very accommodative monetary policy as people expected,

00:39because she actually softened her tone. And at the same time, if you look at the interest rate

00:44differential of the Japanese yen versus US dollar, I think the fair value should be around 142 or 143.

00:53So I think it's probably a kind of market overreaction.

00:59Okay. So Tracy, what does that mean then for this trade that's been very popular and profitable,

01:06which is shorting JGBs, particularly the long end this year? Do you think that trade shorting the

01:12JGB space continues to make sense? Or would you take the other side of that trade?

01:17I think JGB is definitely the anchor of global bond market, especially the

01:23developed countries' bond market. I think if this new prime minister, she wants to do more

01:31fiscal easing and the inflation will continue to go higher, I think the long end potentially have

01:37more room to sell off. And at the same time, you see the curve steepening and the correlation

01:41among all developed bond market are actually relatively high. So you see even the US bond market,

01:49you see bear steepening as well. So I think it might not be the right time to long JGB yet.

01:56There is still more room for them to sell off and the curve steepening.

02:02And to your point, I mean, we've seen the 30-year bond yield, for instance, rising to a fresh record

02:06this morning. But what's been interesting, at the same time, you've seen the sort of gyrations,

02:10particularly the longer end of the curve in Japan. Actually, treasuries and expected volatility

02:14has been at its lowest level in around four years. That's sort of being attributed to the government

02:20shutdown. But do you see that stay in the course? And what's your expectation of where trading activity

02:26goes from here?

02:28For the US bond market, I think we have seen the curve steepening actually have some kind of reversal

02:36in late September and beginning of October until this victory of Takaichi-san. So the curve steepening,

02:46we might start to see the curve steepening again. But at the same time, you see a lot of exciting

02:52development on the AI front. So the hope is for the AI development to boost the productivity.

02:59And if the productivity goes higher in the US, I think the inflationary pressure will be more

03:05more mitigated. And then the long end should have some support. And at the same time, you still have

03:13Treasury Secretary Scott Besant. He has a lot of tool to use to manage the yield curve, right? He can

03:20front load the T-bill issuance rather than issuing the long end. So there's definitely some floor to the

03:29long end. And we still see there is some value in the long end. But at the same time, it's the volatility

03:36is coming back because of this JGB development.