Amazing Story From Japan - Bond Market Liquidity Dries Up

By: John_Rubino

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

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.

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.

By John Rubino

dollarcollapse.com

Copyright 2014 © John Rubino - All Rights Reserved

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