{"id":437390,"date":"2026-09-02T17:24:52","date_gmt":"2026-09-02T10:24:52","guid":{"rendered":"https:\/\/www.swingfish.trade\/blog\/market-news\/a-lesson-from-the-widowmaker-trade-when-being-right-just-isnt-enough-437390\/"},"modified":"2026-09-02T17:24:52","modified_gmt":"2026-09-02T10:24:52","slug":"a-lesson-from-the-widowmaker-trade-when-being-right-just-isnt-enough","status":"publish","type":"post","link":"https:\/\/www.swingfish.trade\/blog\/market-news\/a-lesson-from-the-widowmaker-trade-when-being-right-just-isnt-enough-437390\/","title":{"rendered":"A lesson from the widowmaker trade: When being right just isn’t enough"},"content":{"rendered":"
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For the better part of two decades, traders and investors had a cruel reminder from markets that being right and making money are not always the same thing.<\/p>\n

And that reminder often came from the Japanese bond market, and what was often dubbed as the “widowmaker” trade. Back then, when everyone looked at Japan, this is what they saw.<\/p>\n

A country with massive government debt, extremely low interest rates, and bond yields that looked impossibly low as well. Most people had that eureka moment in thinking that at some point, that combination will make sense and Japanese bond yields will surely have to rise.<\/p>\n

And the trade was to just short Japanese bonds and wait for reality to eventually kick into gear. Except that it didn’t.<\/p>\n

Fighting the BOJ<\/p>\n

The BOJ proved to be the brick wall that was impossible to penetrate. With Japan spending decades trying to get out of the deflation trap by pushing unconventional monetary policy, the central bank also bought absurdly huge amounts of Japanese government bonds and also introduced yield curve control (YCC) to pin down borrowing costs.<\/p>\n

Essentially, anyone who was betting on higher yields i.e. shorting Japanese bonds was going up against the BOJ. And these people may even be right that it did not make economic sense for yields to stay as low as it did during that period. However, that didn’t matter.<\/p>\n

When yields stayed at such low levels for the better part of a decade, these positions were burned. Not least due to things like financing costs, drawdowns, and\/or risk limits. Hence, the nickname for the “widowmaker” trade.<\/p>\n

Then along came the Covid pandemic. <\/p>\n

Covid changes the game<\/p>\n

It was a black swan event for markets that handed Japan a get-out-of-jail free card, in the sense that it helped policymakers achieve something that they had struggled with for almost two decades. That being a more sustained inflation outlook.<\/p>\n

It was almost perfect, just that there is a catch to the inflation rise as it begins to also translate to tighter monetary policy.<\/p>\n

As Japan is beginning to find out, escaping deflation also means that they can’t\u00a0rely indefinitely on ultra-low interest rates that made its enormous debt burden relatively painless to carry.<\/p>\n

And that is where the “widowmaker” story starts to get interesting again.<\/p>\n

With the BOJ having gradually pulled back from its unconventional monetary policy setting and now that inflation is beginning to heat up again, the bond market is starting to rear its ugly head.<\/p>\n

10-year yields in Japan have now climbed above 3% this week, the highest since September 1996. It is creating a rather nasty feedback loop of higher yields, leading to higher borrowing costs and thus making Japan’s fiscal deficit more expensive to finance. And as fiscal sustainability concerns mount, that just pushes investors to demand higher yields in return too.<\/p>\n

Suddenly, the very inflation Japan spent decades trying to manufacture has become part of the problem.<\/p>\n

Being right just isn’t enough<\/p>\n

And this is perhaps where the “widowmaker” trade offers its most important lesson.<\/p>\n

Those who were betting against Japanese bonds for the better part of the 2000s were not necessarily wrong about reaching the end point in all of this. However, they were wrong about when Japan would finally get there.<\/p>\n

They could have\u00a0correctly argued that yields near zero were unsustainable but still lost money for years in waiting for the market to agree with them.<\/p>\n

At the end of the day, it doesn’t pay just to be right.\u00a0Markets are as much about when as they are about why.<\/p>\n

And in trading, being too early\/late is more often indistinguishable from being wrong. The “widowmaker” trade is but proof of that.<\/p>\n

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This article was written by Justin Low at investinglive.com.<\/p><\/div>\n","protected":false},"excerpt":{"rendered":"

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