Japanese government bonds: could this be the best trade ever?

One way to play the terrible state of Japan's finances is with Japanese government bonds, says Simon Caufield. Here, he explains how.

The Holy Grail for investors is a trade with big upside but little risk. Of course, they are very rare. The closest I've come was the dollar in March 2008. At an exchange rate of two to the pound, it was one third undervalued compared to the long-term average. I could not believe it would fall much further.

Triggered by the credit crisis, the dollar duly rose 40% in the next 12 months. And my money market fund paid 4% interest along the way. Over the same period, stockmarkets lost half their value.

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Tax revenue40.9Social security28.7
Transfers from reserves7.2Repayment of maturing bonds11.5
New borrowing44.3Interest on outstanding debt10.0
Row 3 - Cell 0 Row 3 - Cell 1 Transfers to local government16.8
Row 4 - Cell 0 Row 4 - Cell 1 Defence, education & science10.3
Row 5 - Cell 0 Row 5 - Cell 1 Public works5.0
Row 6 - Cell 0 Row 6 - Cell 1 Other10.1
Total92.4Total92.4

Simon Caufield started out as an engineer and has an MA in engineering from Cambridge. This was followed by an MBA from the London Business School.

 

After graduating, Simon worked his way up to become a Management Consultant for banks and insurance companies. This gave him the chance to see the city from the inside.

 

In 2001, Simon started his own company to develop software designed to price banking services, such as loans and deposits. After growing the company to 100 employees, he went on to sell this in 2007, looking for his next challenge. 

 

Also during 2007, Simon ‘sacked’ his fund managers and took complete control over his investments.  Now he devotes all his time to investing and is an angel investor to help start-up companies. He has built up a reputable 20 years in the industry.

 

Simon writes his own investment newsletter – True Value. This follows the strategy he established in 2007 and is based on assets that are priced way below their true value.  He scours the worldwide markets for equities, bonds and alternative investments to find opportunities that fit his conservative and contrarian approach.