Short Interest Grows in Japan Government Bonds

Marc Faber, contrarian investor extraordinaire, has been touting Japanese government bonds as the "Short of the Century" on his Gloom, Boom and Doom Web site and in Barron's last weekend.

"It is only matter of time before investors will pull out money from the ridiculously priced bond market (yielding less than 0.6%) and buy equities," Faber writes on his site. Lots of investors are coming around to Faber's logic -- bonds yields can only go to zero, after all, so shorting fixed-income doesn't seem quite as dicey. However, there's just one little problem: Many investors don't know precisely how to get into the Short of the Century.

Shorting exchange-traded funds, or ETFs, has been a boon for bears on given asset classes or sectors. Unfortunately, there are no ETFs in the U.S. that track Japanese government bonds, or JGBs -- not yet, anyway. So I dialed the 72 numbers to reach Faber in Hong Kong and asked him how to get in on the play: "You'd have to do it through the commodities market. Short the futures."

He's right: JGB futures are traded on the Chicago Mercantile Exchange -- here's a link to their explanation and a further "introduction to JGBs."

Investors who don't want to short JGB futures can simply take the other half of Faber's advice: Buy Japanese equities. He likes NomuraNMR, but thinks the Nikkei is a good play across the board. For those willing to give shorting JGB futures a go, keep in mind some of the quirks of the game.

The benefits include leverage -- margin requirements are as low as 15%, compared with 50% for stocks -- and market liquidity. On the downside: Trading futures requires setting up a commodity account and the contracts have a finite life span -- five contract months for the March quarterly cycle, according to the CME. Also, the futures are yen-denominated, which means you have currency-risk exposure on the margin amount if the yen depreciates. In addition, while the futures trade on the Merc, the active trading hours for the JGB are likely to be when you're sleeping.

Steve Smith, Real Money's options and short-selling wiz, wrote a good primer on shorting bond futures earlier this year. He focused on bond futures in the U.S., but the general parameters apply.