Here’s something you don’t see very often: For a day and a half this week, the Japanese government’s benchmark 10-year bonds attracted not a single successful private sector bid. At today’s artificially-depressed yields, no one wants this paper — except of course the Bank of Japan, which is buying up the bonds with newly-created yen. As the Gulf Times noted:
Japan bond market liquidity dries up as BoJ holding crosses ¥200tn
The Bank of Japan’s massive purchases of government debt hit a milestone this week, sucking liquidity out of the market to such an extent that the benchmark 10-year bond went untraded for more than a day, the first time in 13 years.Data from the BoJ late on Monday showed its holding of Japanese government bonds topped ¥200tn ($1.96tn), or about 20% of outstanding issuance – up by more than half from ¥125tn about a year ago.
The fall in market liquidity looks set to intensify as the BoJ has vowed to continue its aggressive buying for at least another year, with market players expecting it to expand its easing some time later this year.
“Everybody thinks the market is not going to move for the time being because of the purchase by our dear customer, the BoJ,” said a trader at a major Japanese brokerage.
The BoJ stepped up its bond buying last April when Haruhiko Kuroda became its governor, vowing to take radical easing steps to end deflation once and for all.
The increasing dominance of the BoJ in the market, however, resulted in shortage of tradable bonds in the market, reducing trading flows between market players.
Brokers are reluctant to go short, fearing that they cannot buy back when they want. On the other hand, few investors are willing to chase prices higher, when the 10-year bonds yield about 0.6%
The upshot was that the average daily trading band of 10-year JGB futures price so far this month is 0.15, compared to about 0.50 in the 10-year US Treasury notes futures.
The current 10-year cash bonds saw its first trade of the week yesterday afternoon, having gone untraded for more than a day and a half.
Trade volume in the benchmark cash bonds so far this month dropped to less than one trillion yen, down about 70% from the same period last year.
In a sign that the BoJ is also worried about falling bond market liquidity, the central bank tweaked its JGB repo programme on Monday, saying it will offer to sell JGBs twice a day, compared to once a day now.
Yet traders shrugged off the measure as a drop in the ocean. And with the BoJ seen mopping up another ¥60tn-¥70tn of JGBs from the market, few investors are ready to pick up a fight.
“Everybody is holding off buying now only because they want to buy at a higher yield. But in the end, the only strategy you can take under an environment like this is buy more given the shortage of what you can buy,” said Takeo Okuhara, fund manager at Daiwa SB Investments.
One reason many investors are cautious about buying despite tight market conditions is the trauma of sharp reversal in the market rally after the BoJ adopted the current policy last April.
The 10-year JGB yield hit a record low of 0.315% on the following day after the BoJ’s easing, only to jump back to 1% about a month later – a scenario market players think can be repeated, given the fall in liquidity.
“I know this could end badly. But if you are in this market, you will have no choice but to buy,” Daiwa SB’s Okuhara said.
What exactly does this mean? Well, it’s definitely weird. These are the most important fixed income instruments of the world’s third biggest economy, and the only entity willing to own them is the government that issues them. The rest of the world now refuses to lend money for ten years at 0.6% to a government whose debt is 200% of GDP and rising, which leaves Tokyo with only two choices: monetize virtually all its future borrowing or allow interest rates to rise and pay two or three times as much in interest going forward. The latter choice would hobble, if not cripple, an economy that can only function when borrowed money is nearly free.
Here’s a brief interview with prominent Japan bear Kyle Bass noting the country’s “terrible” bond predicament.
In a world of markets rather than manipulations, this kind of imbalance would be an automatic short candidate. Actually, this kind of imbalance would never occur because it would be arbitraged out of existence long before it reached such an extreme. But today, when governments brazenly set prices for just about everything, there’s no reason why the Bank of Japan can’t simply decree a rate of zero or -1% or whatever it wants. As the trader notes at the end of the above article, this can’t end well. But exactly how and when it ends is anybody’s guess.
Finally, things are starting to get interesting. I can’t speak for every institutional and retail investor out there, but I hope they continue to force some “market” discipline on all of this central bank debt monetization.
We all know that a sound, objective monetary system is the ultimate and necessary end in all of these centrally planned fractional reserve fiat currency systems and it is only a question of how and when these will occur. One possibility is that as the central banks realize that they are the biggest suckers in the room – having bought most of the bad debt on the planet – they’ll have no choice but discharge it, once they and everyone else realizes that no one will buy it back nor even repay the principle. That “should” create quite a negative reaction among those who didn’t sell their debt to the central banks (though global investors have repeatedly demonstrated astounding stupidity most of the time). The next intellectual leap would then be that ‘perhaps precious metals and other “real” assets are the more valuable’, hence a market-based revaluation of said assets.
Hey, it’s just a theoretical possibility.
What if the 10 year goes to -1% so that the holder of the bond must pay a fee of 1% instead of receiving interest on his or her holdings. The only reason someone might do this is if they feel the Yen has much appreciation to go so when they convert back into US dollars they will have made a capital gain on their currency conversion. That would mean Kyle Bass is going to get his shirt handed to him. And so far the past several months he has been wrong claiming the Yen is going to 200 from 100. It’s still around 100 after all these months. I think it has come down as well from 111 to 100 even, and 10% loss for Kyle Bass.
Good points Troy. All you ever hear is how dire the situation is in Japan, but the Yen/dollar ratio has been in the 100/1 area for years. And the Euro zone is supposedly in a depression, at least the southern half of it. But you need $1.38 to acquire one lousy Euro.
So as a talking point, let’s assume that a lot of these stories are true, and that Japan and the EU are in very difficult straights, if not outright emergencies. Then where is the USA? And yet, all you hear in the lapdog media is how wonderful is our steady recovery from the 2008 recession. But not wonderful enough to gain any ground on the Yen or Euro, lol.
If you remember the old Wile E. Coyote and Roadrunner cartoons, it is possible that one can run off the cliff without immediately falling into the canyon below, if there is a lag before gravity exerts its influence. This usually happens once one looks down and sees only air beneath their feet. I do not know what will cause the ‘look down’. In poorer countries it is often food prices that act as the trigger. Given that this is going to be a drought year in the USA, I would guess that it is going to get very ugly here (USA) before the end of the Summer.
Japan, makes some of the best products in the world. They should up their export tax to other countries that buy their products.
our own situation is rapidly approaching the Japanese situation…a quick look @ the collapsing bid of US domestic buyers (states, pensions, insurers, etc.) show they are acting sensibly and not buying very low yielding debt that leaves them further underfunded toward their 7-8% annual return targets. They have in essence added zero Notes/Bonds since ’00. But for some reason “foreigners” and the Fed do not act likewise and are happy to buy ever more US debt at ever lower yields? More and more evidence pointing to the Fed as a portion or majority of the “foreign” bid for Treasury debt. The very unnatural occurrence of the falling yields since taper was announced whereby the Fed, the buyer in ’13 of all new and much rollover Notes/Bonds is removed caused no likewise concern or selloff by “Foreign investors”…”foreigners” were unconcerned that yields would rise / prices fall!?! All this while US trade deficits fell in half since ’07 (fewer dollars to be recycled). “Foreign” Treasury holders act an awful lot like the Fed would…unconcerned by potential loses and seemingly only concerned with driving yields lower?!?
Consider…
Jan ’00 – ’07 – Dec ’13
$1 T —> $1.6 T —> $5.6 T (cumulative “foreign” held US Treasury debt)
25% —> 40% —> 55% (% of notes / bonds held by “foreigners”)
1% —> 1% —> 25% (% Fed held notes / bonds…Fed primarily held Bills until ’08)
74% —> 59% —> 20% (% domestically held notes / bonds)
180% —> 130% —> 247% (% public vs. intra-gov debt)
350% increase (public outstanding debt, $3.5 T to $12.4 T)
250% increase (intra-gov debt, $2 T to $5 T)
6.6% —> 5% —> 2.4% (net interest rate on debt)
$300B -> $270B —> $223B (net interest paid on national debt)
$9.2 T –> $13.7 T –> $16.1 T (GDP = 75% increase);
$5.7 T –> $9 T –> $17.4 T (National debt = 305% increase )
What would higher rates look like?
A reversion to the average 50yr yields around 7% would produce Treasury yields with gigantic interest payments, of which nearly half would exit the economy to “foreigners”:
5% blended interest payments = $875 B
7.5% = $1.3 T
10% = $1.75 T
(btw – total ’13 Federal tax revenue = $2.8T)
This is not to mention the impacts on RE/CRE and business lending, etc.
Something is quite amiss.
The “foreigners” are mainly the central banks of countries that export goods to the US. In a way they have “no choice” – or, rather, they do it maintain the monetary system now in place.
The US pays for imports with US dollars and the foreign exporting companies then convert those dollars (or most of them) to their local currency to pay their manufacturing costs (e.g., labor/payroll, materials, etc.). The conversion (i.e., the dollars for local currency swap) is done automatically by the banks that receive the companies’ US dollar deposits and they then turn around and sell those dollars on the foreign exchange market or to their country’s central bank to get back the local currency they gave to the depositors. The central banks then may keep some of those dollars as “foreign reserves” but usually buys US Treasury bonds instead to earn interest. From their standpoint, they either own cash/dollars that earn nothing or they can own Treasury bonds “that are as good as cash” and earn at least something. Besides, just like in Monopoly, those US dollars in the hands of the US can then be used to buy more imports.
By the way, this is how the US exports its inflation, which is one explanation for why QE has not been as inflationary in the US as some have feared. It’s exported to other countries which is why foreign (mainly emerging/developing market) currencies keep weakening (i.e., their local currency prices increase). The money supply of local currencies keep expanding because of all the dollar swaps.
Well explained. I learned something.
This talk about deflation is nothing short of idiotic. Anyone who pretends the Japanese can print their way out of trouble has never heard of the massive inflation experienced in Weimar Germany, or much more recently, Hungary and Yugoslavia. What part of “monetizing the debt” does the author not understand?
Maybe not the author of the article, but the authors of the existing fractional reserve banking system deems about 2% per annum to be a reasonable and not quite objectionable profit – or degree of skimming – from all monetary transactions.
In essence that means that on average global monetary credit must increase by 2% annually or, in other words, that “economic growth” must increase by the same. If or when economic growth flounders, as it has recently since 2000 and especially 2008, then the hope is that credit growth can be stimulated by the “monetization” of existing debt to facilitate additional debt to be taken on by those relieved of old debt (i..e, those who sold their debt to a central bank). Trouble is, even those who sold their debt (or have just outright defaulted) don’t want to get more, and they aren’t increasing their productivity/incomes either to grow the economy.
There are just too many structural obstacles to maintaining the (arbitrary) rate of 2% growth and ultimately that’s going to bankrupt the system. And then it will probably start over, unless this time people choose (and maintain) a system that can benefit anyone and everyone equally and indefinitely, at the expense of everyone disproportionally and for just a few generations, which is what this latest incarnation of the central banking/planning system has been.
There is another story in regards to Japan. Since the first of the year, investors have been short the Japanese Yen, FXY, and short the Japanese Financial Institutions, IX, SMFG, MFG, MTU, causing the Nikkei, NKY, to fall lower as is seen in their combined ongoing Yahoo Finance chart http://tinyurl.com/lhpu59n
At the same time investors have been long a number of other currencies such as the India Rupe, ICN, with the result of a carry trade rally India Small Caps, SCIN, and other small cap nations, such as New Zealand, ENZL, Singapore, EWS, Developing Africa, GAF, Philippines, EPHE, Indonesia, IDX, Gulf Dividends, GULF, Egypt, EGPT, and Denmark, EDEN, as is seen in their ongoing combined Yahoo Finance Chart http://tinyurl.com/mtjr9vp
Like parachutists falling from the sky, maneuvering to maintain equal altitude while reassuring each other these new fangled Keynesian parachutes will soon open and lift their nations. But these parachutes? Who designed them? Shouldn’t they be guaranteed?
Nice
read! Very informative. Something interesting: Apple vs. Samsung: Smartphone
rivals billions apart in value of patent feud. Read it here: http://bit.ly/Qtglga
Somebody please help me: the article says there is a lack of tradeable GoJ bonds in the market, thus traders don’t want to go short, fearing they can’t buy the bonds back. It’s obvious noone wants to buy that junk but there should be no shortage of willing SELLERS, happy to get rid of these bonds while they are worth something. What am I missing?
“Short selling” is a trading strategy in which one borrows something for a fee and for a certain time limit – in this case Japanese government bonds – and then sells them at some price with the expectation and hope that one can buy the bonds back at a lower price and return them to the lender/owner within the time limit, thus pocketing the difference between what he sold them for and the (hopefully) lower price that he bought them back (plus his transaction fee).
Now, in this case, traders are afraid that the bond prices will rise in the near future because the “crazy” BOJ may decide to “double down” on its debt monetization efforts, thus offering so much to buy JGB’s that even heretofore non-sellers would capitulate, thus foiling the short sellers’ strategies.
Ironically, the short sellers would agree with you that “noone” wants to buy JGBs (except the BOJ itself and certain institutions that may be mandated to) so there should be many willing sellers. However, the current bond holders are thinking two things: By trading my bonds for cash I will earn nothing rather than just very little (and where else can I make a return besides the stock market?); and since the BOJ is so intent on buying my bonds then maybe they’ll bid up the price, so I’ll keep them – which is what the short sellers fear.
Hi! The article claimed short selling doesn’t take place cause traders fear they can’t buy the bonds back, not that they fear higher bond prices:
“The increasing dominance of the BoJ in the market, however, resulted in shortage of tradable bonds in the market, reducing trading flows between market players. Brokers are reluctant to go short, fearing that they cannot buy back when they want.”
It was with that context in mind I asked the question. How can there possibly be a shortage of sellers of JGBs, at these prices? Your answer in your final paragraph is that owners simply do not care about the risk-adjusted return. They just want a return and ignore the risk.
And that’s probably it. The full answer may be: “No rational investor, that is one who calculates risk-adjusted returns, owns JGB. Who’s left in the market are irrational holders and since by its nature, irrational behaviour cannot be predicted, shorting JGB is risky cause the existing holders may not sell, at just about any price that gives them a yield >0.”
Pertaining to the first paragraph you quoted, there are always going to be some sellers but because the BOJ buys just about all that’s available at the prevailing price level few bonds are left that other participants can buy at that price level, hence the shortage of “liquidity”. Therefore, short sellers don’t want to go short because they may not be able to buy the bonds back at a lower price than they sold them for. The BOJ won’t sell them back, and there are precious few others who would either, for the reasons mentioned.
Your point that, “No rational investor, that is one who calculates risk-adjusted returns, owns JGB” is debatable. After all, it depends upon your position within the system. If your a pension fund manager, say, with trillions of yen that needs to be invested you don’t have that many options, especially if the pension mandates a certain percentage of JGBs be held. Furthermore, if the official ratings agencies of the world deem JGBs to be hunky dory then “who are you” to say otherwise? You want to try to defend yourself in court over that, especially if your alternative investment is either rated more risky than JGBs and/or goes south? Also, don’t forget that people (K. Bass, famously) have been calling for Japan’s implosion for years and it still hasn’t happened. If deflation continues in Japan then JGBs will end up looking like an okay deal.
I could go on, but I nevertheless agree with you. I wouldn’t buy JGBs. At least 10-year Treasuries pay pay four times as much and US debt to GDP is half of Japan’s.
If you have a lot of money there aren’t that many options; you really become inextricably linked to the financial system. I don’t know if the contents of a safety deposit box at a bank is considered “part of the banking system.” I don’t know how that works during, say, a “bank holiday” when electronic account activity is ceased. Maybe the banks don’t really close and will allow access to one’s box. I hope so because in my efforts to diversify I keep some valuables in a bank box that are worth a lot more than the “cash” I keep in my bank accounts.
Yeah if I were a Tokyo-based bureaucrat type pension manager I just might close my eyes and buy JGB. With the equivalent logic of a Wall Street pension manager who mutters to himself, “noone gets fired for buying GM”.
I concur that if you a billionaire, you are linked to the financial system. If you are a mere millionaire, you can exit, by shifting to physical cash and physical precious metals.
Warren Buffett says “the market can stay irrational for longer than you can stay solvent”. So I am not shorting the yen (yet).
I am surprised you think it possible that Japan JGB may turn out an ok deal. According to ZH, one out of two tax dollars goes towards interest payments (23 out of 50 trn yen). And, of course, rising. How is that supposed to work out?
Ok, I’m game. Stranger things have happened. Let’s go through possible scenarios. With deflation, one way to reduce the interest rate burden on the public purse is for the BoJ to decreases rates further (financial repression), another is to reduce the bonds outstanding to the public (monetization). Either makes the Japanese bond buyers look like total lemmings who don’t look left nor right, but maybe I am just lacking imagination. Another real radical way it might work out is that interest payments exceed tax revenue, but investors still don’t care, as long as the BoJ pays the interest.
Someone said that Japan’s bond market doesn’t need pin to pop, just a light blow of air will do.
Another way to soften reality is to say the BoJ already holds one fifth of BoJ bonds, so that’s already monetized, thus the debt that matters is the remaining 4/5, reducing it by a penstroke from 230% to 180% of GDP.
All of this doesn’t wash with my economic intuition that a bond market revolt is the far more likely outcome. Hey I’ve been wrong before, too many times to count, but this one just seems like a no-brainer. The Japanese seem to have a national penchant for over-the-top policies, from kamikazis and now small galaxy-sized debt. I can see Abe in a room with his central planners, saying “hey yup according to all rules of the game we’re bust, but as long as we can keep our faces straight, let’s see how long it takes them to call our bluff”.
I didn’t mean to imply that I think JGBs might turn out okay; I was trying to speak for the mentalities who already own them. Japan has experienced price deflation from the 90’s until recently, and it was Japan who “invented” quantitive easing in the first place, and they have tried it about 7 times prior to various degrees and durations and it hasn’t done anything for the mass economy other than create price deflation, sustain the banking system and various legacy industries, so it’s not unreasonable to doubt that this latest, greatest version spurred by Abe to be any different (unless you believe that it may still not be enough.)
The truth is that QE is inherently deflationary because it turns one of the most fundamental “laws” of economics upside down. QE necessarily lowers prevailing interest rates by increasing (bidding up) the price of government bonds. In a “zero” interest rate environment (meaning, short term interest rates are practically zero and thus long term rates are low too) then there is little to be gained by saving money to earn interest, however, existing debt servicing costs that may be at fixed non-zero rates can be reduced by paying the debt off more quickly than one would otherwise. The “savings” due to lower debt servicing (i.e., interest payments) can be – and actually are – net gains monetarily, equivalent to earning interest on the payment amount. This is why paying off a debt that charges, say, 10% interest is mathematically equivalent to earning 10% interest on some investment. (Actually it’s equivalent to an investment return somewhat higher than 10% because the principle pay down is a certainty whereas every investment always entails some risk.) So low interest rates actually discourages investments and encourages debt servicing. This partly explains where all the money created by the central banks is going. It’s deflationary in terms of economic activity, and transfers private debt to the public by paying off the private debts (e.g., MBS) with borrowed money in the form of government bonds.
Again, I’m with you on just how crazy things can get. Don’t know.
Chris Mackney committed suicide on December 29, 2013 because his ex wife was using the divorce courts in America to torture him and kidnap his children from him. He wrote a 4 page suicide note before killing himself.
http://www.brainsyntax.com/Portal/Material/1/Lasttestamentofalovingfatherabusedbythefamilycourtsystem.pdf
MAKE THIS VIRAL! THIS IS THE MOST IMPORTANT ISSUE EVER TO HIT THE MRA/MANOSPHERE WORLD. THIS IS WHY YOU NEVER GET MARRIED IN AMERICA!!!!!!!!!
LATEST UPDATE: The ex-wife is such a psychopath that is she trying to copyright her ex husband’s suicide note, in order to prevent it from being circulated on the internet. She is using her lawyers to threaten legal action against websites that published Chris’s suicide letter.
The website “A Voice for Men” also got a letter from her lawyers and wrote an article about it yesterday:
http://www.avoiceformen.com/mens-rights/family-courts/here-come-the-lawyers-to-avfm-yet-again/
Full info on his evil ex-wife here
http://dinamackney.com/contact-us/
Her Facebook: https://www.facebook.com/dina.mackney?fref=ts
Her Twitter: https://twitter.com/dinamackney
Her LinkedIn: http://www.linkedin.com/pub/dina-mackney/6/331/54a
Her personal website: http://dinamackney.com/
Her email addresses:
customerservice@dinamackney.com
info@dinamackney.com
repairs@dinamackney.com
wholesale@dinamackney.com
press@dinamackney.com
Her office address:
Dina Mackney Designs
11490 Commerce Park Drive, Suite 306
Reston, VA 20191
. .. , . , … ,,, .,
Japan will be the first to collapse, their path is not sustainable and it’s one minute to midnight. You all know the story about the stadium being filled with water experiment. Start filing at 11pm. At what time does the stadium completely fill with water given it’s only half full or half empty.
One minute to midnight.
Guess what….
I’m really enjoying the design and layout of your website.
It’s a very easy on the eyes which makes it much
more enjoyable for me to come here and visit more often. Did
you hire out a designer to create your theme? Excellent work!