Bond Shortage!
On Friday, yield on Japanese 10-year bonds hit a record low -0.135%. According to Bloomberg, the chief strategist of Bank of America Merrill Lynch in Tokyo stated those 10-year bonds look “relatively cheap”.
Supposedly they are relatively cheap compared to “other tenors”. I presume he means 20-year securities yielding a record low 0.29%.
Meanwhile, the head of fixed-income investment at PineBridge Investments Japan offered this amazing tidbit: Investors are buying shorter-dated debt “as there aren’t enough 30-year, 20-year bonds available.”
Bond Shortage Proposal
Mercy me! There’s an outright shortage of 20 and 30-year Japanese bonds. Japan better float 20 quadrillion Yen worth of them pronto.
If that sounds absurd, then please consider additional details from the Bloomberg report Japan 10-Year Yield Drops to Record, Below Negative Deposit Rate.
Japan’s 10-year bond yield dropped to a record minus 0.135 percent, falling below the the negative deposit rate introduced by the Bank of Japan last month, after the central bank’s operation to buy long-term debt met the lowest investor participation on record.
The yield on the benchmark 2026 notes dropped as much as 8.5 basis points after BOJ’s operation Friday to buy bonds with 10 to 25 years to maturity had a bid-to-cover ratio of 1.35, about a third of the level last week. The yield on 20-year securities tumbled more that 10 basis points to an unprecedented 0.29 percent. Forty-year bonds haven’t traded on Friday at the nation’s largest inter-dealer debt broker after changing hands on Thursday for the first time this week.
The results of the BOJ’s bond operation led to “panic buying,” said Shuichi Ohsaki, chief Japan rate strategist at Bank of America Merrill Lynch in Tokyo. Ten-year bonds look relatively cheap compared with other tenors, attracting buyers, he said.
The amount of Japanese bonds in the market offering negative yields has doubled this year to exceed more than 600 trillion yen ($5.4 trillion) earlier this month, driving up volatility in the local market and helping to bring down global yields.
“It goes to show how the BOJ’s negative interest-rate policy is so strong,” said Tadashi Matsukawa, the Tokyo-based head of fixed-income investment at PineBridge Investments Japan. Investors are buying shorter-dated debt “as there aren’t enough 30-year, 20-year bonds available,” he said.
One Quadrillion Coming Up
There’s a mere 600 trillion yen ($5.4 trillion) in negative-yield Japanese bonds. I say “mere” because of the clear shortage.
One quadrillion is 1,000 trillion.
Since there are already 600 trillion yen worth of negative-yielding bonds in the alleged shortage, my preposterous-sounding 20 quadrillion proposal could eventually happen.
At the current pace, we will easily see our first quadrillion in negative yielding bonds by the end of the year. Why not 19 more?
Does this report, and the quotes in it, sound more like it’s from The Onion or the Twilight Zone?
Mike “Mish” Shedlock
Other than whatever is needed to be bought due to mandate (even that is silly for negative yield) why would anyone buy bonds. Is it not better to hold cash? Is it again storage issue?
yep – storage space and insurance
Storage, and the expectation of flipping before maturation for a capital gain. Who is seated when the music finally stops?
The trend for Japanese pensioners to diversify abroad after the Abenomists declared war on the Yen, is likely abating; given every other central banker is now engaged in waging war on their currency as well. So there may well be a period of unexpectedly high demand, as funds are being repatriated, or at least diversified abroad at a slower rate than the “market” (as in the BOJ) expected.
MISH – I am beginning to believe this horror show can go on forever!!!
It won’t go on forever. My theory is this- we approaching the limit of full monetization, and have always been doing so. The closer you get to that limit, the more government bonds and currency become fully interchangeable- you see this in the falling nominal rate curves for government debt- after all, currency has a zero nominal rate and the bonds are approaching this. Right now, still, people are willing to hold both in a sort of see-saw manner, interchanging one for the other and back again. At some point, when capital gains can no longer compensate for the negative rates on debt, a flip will have been switched and both will start to be regurgitated at the same time. That is when the game is up and hyperinflation destroys both.
It is likely to go on till the storage and insurance costs is more than the negative interest rates. But after that if holding cash is not banned, then can you imagine what can happen. Anything short of total collapse would be a surprise to me.
its gonna end very badly… i live in Japan and don’t know what to do…. worse I took a fixed rate mortgage at 3% 10 years ago I look very silly in retrospect
Noob question… why not refinance?
In Japan the last time I checked, all the bonds go to the CB, Japanese investment firms, and the Japanese public. Of course the government can do or say what they like and the people believe the crap they spout. When you have a captive audience that is obedient and nationalist they will put up with almost anything. The smart money left a long time ago.
The public owns the bonds so the gov. can issue all they like and the BOJ will buy them. Not rocket science and this is why Japan has carried this charade on for so long. The EU is doing the same thing basically. The USA does this as well, but we also issue treasuries for trade deficits.
You are essentially right. This has gone on and will continue for longer than most people think because Japan has accumulated a huge capital base over the past 60 years. They also run trade surpluses with the rest of the world (most of the time nowadays) so foreigners will not be stuck holding huge amounts of negative-yielding debt. The strength Yen (relative to most other currencies) means that foreign owners would probably have F/X gains that more than offset the negative bond yields.
This will of course eventually end with “bang” and probably all at once. But trying to predict when is a fool’s game.
I’m expecting the next President/Congress to enact legislation forcing 401K’s and IRA’s to require 10% of additional contributions as Treasuries. This will be floated as a way to save Social Security and Make America Great Again. Public employee pensions will be exempted, the excuse will be that they don’t pay into nor collect Social Security. I cannot say whether this comes before or after means testing, but it will happen once there are any rumblings about big banks having solvency issues.
Currency currency currency
Investors are buying bonds to reap fx gains.
Yen will strengthen as carry trade unwinds … and china’s yuan devaluation looming.
Can you explain this, please? I buy a bond paying 1.05euro expecting to get 1euro 1 year hence say. I stay put with the 1.05euro in cash — with deflation it may be worth 1.055. In what way does the fx gains differ in both the cases?
Carry trade in reverse.
For years investors have borrowed in yen … and used yen to buy assets denominated in another currency … and paid back yen after it weakened. Making profit (hopefully) on both asset bought and currency gain.
Yen now around 112 to the $US. I fully expect it to strengthen to (at least) 100 to $US. So, if I borrowed and bought today (yen denominated asset – in this case bonds) in $US at current exchange rate, I’m willing to take negative yield / capital loss on bond (but again, I’m probably front running BOJ as bonds move even more negative in yield so actual capital gain) when I sell sometime in future – say 100 yen to $US – and pay off $US loan (my yen proceeds will reap more $US than borrowed … so I can pocket the difference). With leverage the return could be HANDSOME.
Makes sense if yen strengthens. If not – HOSED.
“If that sounds absurd…”
It seems to me that those in charge are plumbing the depths of absurdity, to fight the laws of nature and math. They are science deniers.
It’s a lot simpler once you realize that “those in charge” are doing nothing more than stealing from those they can get away with stealing from. The Japanese Government/ Central Bank, are no more aiming to help those Japanese that are not part of their own inner circle, than what is the situation over here.
As long as those being robbed, keep clinging to the ridiculous notion that governments and central banks and other such institutions can somehow be useful for something, they will forever remain easy marks.
If you think of a modern credit economy as a complex machine, such a device must obey certain governing equations. Without knowing anything about those equations we know they must be dimensionally homogeneous. Thus, we can clear these by grouping all variables(including time) with parameters (like interest rate) to form so called dimensionless groups. In this way, whatever the governing equations are time is replaced by a dimensionless time group like i times t. This is of course how time appears in financial models we are familiar with.
Now this reveals a useful way of looking at interest rates. No matter what the correct model for an economy is the correct scaling for that model is interest rate. If the interest rate goes to zero dimensionless time stops. This is intuitively what CB’s achieved by moving to zero rates. They slowed down economic time relative to physical time. Like many machines you can probably get away with stopping the economic machine this way.
Continuing the analogy, setting interest rate to negative values is tantamount to running the machine backwards. Most machines can be stopped but very few can run backward. In the case of economies this implies money flows will reverse. Instead of checking account sweeps flowing into money markets the flow reverses and money markets disgorge cash into checking accounts? Say what?
Reblogged this on My Blog.