Japan’s dysfunctional bond market is not only inverted between three month and eight years, it also sports negative yields out to 10 years.
The yield curve also inverts between 30 and 40 years, albeit in positive territory.
Inverted means longer-dated bonds yield less than shorter-dated bonds.
“It wouldn’t be surprising to see some BOJ operations fail,” said Yusuke Ikawa, a salesperson at UBS Group AG’s Knowledge Network in Tokyo. “The biggest risk of that is in superlong bonds.”
The above quote from an excellent Bloomberg article entitled Japan’s Bond Market Is Close to Breaking Point.
Signs of stress are multiplying in Japan’s government bond market, which is crumbling under pressure from the central bank’s unprecedented asset-purchase program and negative interest rates.
As buyers hang on to debt offering interest returns, the BOJ is finding it harder to press on with bond purchases of as much as 12 trillion yen ($107 billion) a month, sparking sudden price swings leading to yield curve inversions that have nothing to do with economic fundamentals.
Twisted Tale
[Highlights in purple by Mish]
Yields on 40-year JGBs dipped below those on 30-year securities Tuesday, and a BOJ operation to buy long-term notes last week met the lowest investor participation on record. Bond market functionality has deteriorated, with 41 percent of respondents last month rating it as “low,” the highest proportion since the BOJ began the quarterly survey more than a year ago.
Demand for JGBs has increased so much since the start of negative-rate policy that it’s flipped the market for repurchase agreements on its head: Dealers who in normal circumstances would pay to borrow overnight cash in the repo market — offering debt as surety of repayment — are instead willing to pay to get access to the collateral.
The BOJ has already cornered close to a third of the JGB market, more than any other class of investor. That proportion will grow as asset purchases continue — even without an expansion of easing.
The central bank is also buying negative-yielding bonds in the market, which has an overwhelming majority of the world’s sub-zero debt.
The market disruptions raise concerns that the BOJ is nearing the limits of its stimulus, even as Kuroda has said the central bank can do more. There are also questions over whether, if the central bank is forced to exit prematurely, the market can withstand the potential shock.
“How can the BOJ head for the exit?” Dan Fuss, vice chairman of Loomis Sayles & Co., said at an event in Tokyo last week. “If they open the exit door, there’s a fire on the other side.”
Fire on the Other Side
I commend Bloomberg writers Kevin Buckland, Shigeki Nozawa, and Wes Goodman for a noteworthy article accompanied with excellent charts.
The only thing worth quibbling over is the title. I repeated a portion of their title simply because it sounds better.
Japan’s bond market is not “close to the breaking point”; rather, it’s clearly broken.
Alleged Bond Shortage
I last spoke of this troubled mess on March 18 in Alleged “Bond Shortage” as Japan Cruises Towards One “Quadrillion” Yen of Negative-Yielding Bonds
Twilight Zone Central Banking
There’s 600 trillion yen ($5.4 trillion) in negative-yield Japanese bonds right now. At the current pace, we will easily see our first quadrillion in negative yielding bonds by the end of the year.
One quadrillion is 1,000 trillion.
Only in the Twilight Zone would one expect to find close to a quadrillion in negative yielding bonds with the yield curve inverted on top of that. Yet, here we are.
A currency crisis of some sort awaits.
Mike “Mish” Shedlock
Reblogged this on EMerging Equity.
“A currency crisis of some sort awaits”.
Absolutely
Just not the one most expect … at least at first.
Yen will strengthen as carry trades unwind.
BOJ outta bullets in quest to further weaken.
I, for one, am just grateful these financial stressors are now, and will remain forever, contained inside the Japanese economy.
You have to be joking! What planet are you living on.
The ramifications will be world wide.
We live not only in a global village but a global economy. When there is a rush for the doors it will be a rush into selling into every market.
What does that lead to?
The exit for Q/E is a simple exchange of letters between the Finance/Treasury ministries and the central banks that says “let’s just cancel the Government debt and leave the cash in the system”.
Governments cannot repay debt, the value of which represents the accumulation of fraud, corruption, false promises and other issues gathered up over decades of crime.
The future has been consumed under the present model of Reagan’s “deficits don’t matter” and the concomitant level of accumulated debt.
The US/Japanese/European central banks can do this or invest the worthless Government debt on their books by talking Governments into investing in “(more, in Japan’s case) infrastructure spending like “bridges to nowhere”.
In the case of the US, the infrastructure spending can be on transportation plus automaton/internet basing/robotics for government services like education and health. In the case of Japan, they may as well build underwater cities ad desalination plants/non-nuclear alternative energy plants. For Europe, it is a complete city to house displace persons.
All thes alternatives are more real than the dying/non-dancing clowns operating at the central banks.
I’ll pay you to hold my money.
NOT!!!!
These negative interest rates are just another form of taxation or cash confiscation, but they do have fascinating theoretical possibilities at their more absurd extremities: If Japan had a -10% interest rate on its bonds, and a tax law like the Obamacare tax law forcing people and companies and money funds to buy all the bonds (instead of health insurance)… Then it would be “Perpetually Self-Funding Deficits” into Posterity (or Collapse, whichever comes first).
Why pay to borrow money, if you don’t have to? Certainly governments have the force of law behind them to make it so. 10% of $5.2 trillion is $520 billion. Would be enough to take care of the USA budget deficit some years. QE plus high negative interest rates must be what the governments and central banks of the world have in mind. They could call it the New Patriot Act in the USA, but make it compulsory like the draft. Might be some colossal “collateral damage,” but the central planners will no doubt be exempted and be adequately protected in their lairs (and have statistics to prove its success, even if it seems otherwise).
Why do it in baby steps of tenths at a time? Why not just go immediately to the extreme with this uncontrolled experiment, and get the lunacy over with immediately instead of another lost decade. Absolute power is the power to destroy absolutely. Japan should get its self-destruction over with quickly, and then move on.
$6.7 trillion in Sovereign Bonds are already trading with negative yields. In the coming years, the number will be significantly higher with contribution from euro area and potentially the US…http://www.disruptiveinvestor.com/index.php/economy-global/sovereign-bonds-worth-6-7-trillion-with-negative-yields
Are “buyers hanging on to debt offering interest” related to or responsible in any way for the recent strength of the yen with respect to the USA dollar (falling USD/JPY)?
Is this phenomenon of buyers hanging on to debt offering interest returns responsible in any way for the recent, relative strength of the yen with respect to the USA dollar (i.e. falling USD/JPY)?
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