Japan is the home of the “widowmaker” trade: the obviously mispriced Japanese government bonds (JGBs) which keep getting more and more mispriced until all the short-sellers have gone out of business.
JGBs claimed victims in 1993, 2003 and 2013, when yields plunged in the face of all the arguments presented by the bond vigilantes worried about the slow economy and government debt at levels unheard of elsewhere in the world.
This year was meant to be different. Frantic money-printing by the Bank of Japan last year weakened the yen and so pushed up the price of imported goods, particularly energy, while signs of consumer spending allowed shops to push through price increases. Read more
The whole we’ll taper soon, oh no, actually not yet behaviour from the Federal Reserve last summer had, as you would expect, an impact on the volume of US treasury trading.
But it didn’t last. JP Morgan reports that monthly trading volumes of $2tn in April rose to an average $2.7tn in May and June, then dwindled with overall volumes for the year actually down on 2012. What might surprise, however, is that the post crisis decline in volatility for Treasuries (and many other securities) has not been seen in German Bunds and Japanese sovereign debt. Read more
Who knows. But we can report that this report, from Reuters, caused a sharp trend reversal in Japanese equity futures on Thursday accompanied by a sudden weakening of the Yen.
The daily attempts of Bank of Japan and Japanese government officials to calm volatile equities/yields/yen is becoming dizzying. For Kuroda in particular it must be exhausting. The poor guy is everywhere.
Still, Tuesday’s efforts saw the Nikkei up 1.2 per cent and the yen down 1.2 per cent against the dollar and above Y120. However, Japan’s 10 and 5 year yields headed back above 0.9 per cent and 0.4 per cent respectively: Read more
The Nikkei*, today:
What happened early in the afternoon session?
This: Read more
The Bank of Japan’s May statement on monetary policy is out, and it’s basically a big MAINTAIN on its ‘quantitative and qualitative easing’ (QQE) programme.
If anyone was anticipating the BoJ might take this opportunity to point out it is mindful of recent rises in government bond yields — and apparently some were expecting this sort of reassurance, possibly even tweaking maturities purchased — they would be disappointed. Equities traders just seemed relieved that their rally will continue.
However one member, Takahide Kiuchi, proposed the 2 per cent inflation target shift to a “medium to long term” and the new QQE plan itself be designated as “an intensive measure with a time frame of about two years”. Kiuchi’s proposal at this meeting was voted down by the other eight board members. The central bank has, however, already revealed that some members are concerned about the risks of its QQE plans hurting retail investors in Japanese government debt. Read more
Japanese government bonds have kept stumbling. Small beer anywhere else in the world, but considering the policy experiment ongoing over there it’s worth keeping an eye on.
We’re not too excited yet but here’s a chart of five and ten year yields and some speculation anyway… Read more
Something to keep an eye on (the respective reaction of the 6mth, 2-year, 5-year, 10-year and 30-year JGBs to the BoJ’s QE onslaught):
The landslide win for the Shinzo Abe-led Liberal Democratic party in Japan at the weekend pushed the Japanese yen to its weakest level against the dollar since April 2011 (inverted chart, don’t ya know):
And this one might prove more precipitous than its famous US cousin.
From the FT’s Ben McLannahan:
In an echo of worries in the US over the $600bn of spending cuts and tax increases due to take effect in January – the so-called fiscal cliff – Japanese politicians are at loggerheads over a bill that would allow the government to borrow the Y38.3tn ($479bn) it needs to finance this year’s deficit.
Markets in Asia were apparently very skittish earlier today in partdue to fears that earnings could be affected by tensions between Japan and China over the Senkaku/Diaoyu islands. This in turn was no doubt exacerbated by the news that not only are the big four Chinese banks skipping this week’s IMF meeting in Tokyo, but the PBoC governor and the finance minister are also sitting it out, instead sending along their respective deputies.
From Bloomberg: Read more
Tetchiness about Japanese bonds seems to be reaching an all-time high lately. But JGBs are not, so far, playing along. The Japanese parliament’s failure to raise the sales tax in the early hours of Wednesday didn’t do much to rattle Japanese bondholders, as the WSJ’s Real Time Japan blog notes. Strong domestic demand, and foreign buyers expecting that the yen might not remain at the lower rates seen over the last month are two reasons ventured. It’s what Andy Xie described this week as the wrong but self-fulfilling belief in the (perpetually) strong yen, in a lengthy piece about a looming crisis for the currency.
The yen has, nonetheless, seen something of a weakening recently, thanks to the BoJ’s Valentine’s Day intervention. And there is some optimism around Japan’s economic growth generally, though a lot of it relates to the post-tsunami rebuilding effort. Both the rebuilding and the weaker yen are cited as one of the reasons the Nikkei is performing relatively well this year and has returned to its pre-tsunami level. Read more
If anyone is an expert on the unintended effects of quantitative easing, it’s the Bank of Japan.
In fact, one might say, what the Fed, ECB, BoE are facing today, the BoJ has already faced. What’s more, what the BoJ is facing today, the Fed, ECB, BoE will face too. Read more
Japan spent a record Y4,510bn ($58bn) on one day’s currency intervention in August as it tried to stem the rise of the yen, according to figures released on Wednesday by the country’s Ministry of Finance, the FT reports. The MoF data did not specify which currencies were bought and sold, nor the date on which the action took place. Traders said, however, that the Bank of Japan only intervened on behalf of the government on August 4, and only in the dollar against the yen. That meant the amount of intervention, which was in line with market estimates, was more than double the previous daily record of Y2,125bn that Japan sold on September 16 last year to rein in its currency. The intervention effort on August 4 initially pushed the dollar up from around Y77 against the yen to over Y80. But the Japanese currency, which has been driven higher as investors have sought a haven from concerns over eurozone and US debt and a slowing global economy, quickly pared its losses, rising to a record high of Y75.93 on August 19. The yen currently stands around Y77 against the dollar.
Japanese history lesson by Citi rates strategist Mark Schofield — probably you can guess the subject:
It is tough to just look at the price action in Japan as the policy process was so long and drawn out. The Rinban operations [bond buying which targeted the level of bank reserves] did not start in earnest until 2001, after the “lost decade” and once deflation had truly set in. Nevertheless at the point at which short rates hit the kind of levels we see in the US today and bond purchases began in earnest, the 10yr JGB yield was 1.5% and the 2s10s curve was 135bp, compared with 2.20% 10yr Treasuries and Bunds and yield curves of 203bp and 160bp respectively… Read more
Fitch has revised Japan’s outlook to negative from stable, FT Alphaville reports. “Japan’s sovereign credit-worthiness is under negative pressure from rising government indebtedness,” Fitch said. FT Alphaville says stand by for commentators pointing at deflation-ravaged low JGB yields and concluding that Fitch is not being overly smart. Read more
Just when I thought I was out, they pulled me back in.
Into a global liquidity push, that is. Even as other central banks are very slowly heading for the exits (again?), the Bank of Japan last week unleashed some ¥28,000bn of liquidity as it sought to avert an earthquake-sparked credit crunch. Read more
FT Alphaville has already cautioned about the chaotic effects the Japanese crisis is having on variance swaps. But here’s another potential (derivatives) spillover.
It’s the effect on “Power Reverse Dual Currency Notes” also known as PRDCs. Read more
The Bank of Japan on Monday made Y21,800bn ($265bn) available to financial institutions and doubled its asset-buying programme to Y10,000bn in a bid to stabilise markets following the country’s worst ever earthquake disaster, reports the FT. In its largest ever one-day liquidity operation to calm markets, Japan’s central bank said it would make Y15,000bn available immediately and a further Y6,800bn over the next two days in order to deal with an expected rise in demand for funds. FT Alphaville notes the tremors between Japan’s megabanks and Japanese government bond holdings.
This is not your typical Japanese government bond post.
After Friday’s almighty earthquake, Japanese government bond futures rallied (the cash market was closed immediately after the event), reportedly on safe haven demand. But there’s still plenty of JGB bearishness around too — with worries that new liquidity measures and the cost of rebuilding could eat into Japan’s finances. Read more
From Reuters’ financial graphics editor, Scott Barber:
By now you’ve perhaps heard about the ticking, aging timebomb underneath Japanese government bonds. Or predictions of a negative savings rate. Or sovereign downgrades.
But what of the super safe Japanese mortgage market? Read more
An auction of five-year Japanese government debt has sold bonds cheaper than the market had expected, again suggesting that economic recovery is hampering demand for safe-have assets, Dow Jones reports. Bid cover for the auction fell to 3.56 from 3.97 at a previous sale. Ten-year government bond yields hit a 10-month high following the auction, FT Alphaville notes, adding that JGBs are entering a season of volatility. Having been among the biggest supporters of the market in recent months, Japanese banks are now sitting on huge positions beset by rising yields and increasing yield volatility, implying little appetite for further forays into JGBs in the near future.
Never short a Japanese government bond — no matter what you think of the country’s debt-to-GDP ratios, demographics, savings and the like. The JGB market can stay irrational longer than you can stay solvent etc. So swaption it, instead.
Here’s Bank of America Merrill Lynch’s Bin Gao on why: Read more
Japan has just announced that its national savings rate rose to 5 per cent in 2009, from 2.2 per cent in 2008. But already some analysts are predicting a sharp reversal in the trend. Goldman Sachs’ Chiwoong Lee thinks the rate is about to turn negative.
From a Monday note: Read more
Have we been here before?
Not to be outdone by Japan’s (now former) top government spokesman Yoshito Sengoku, who said earlier this month that the country’s finances were about to fall off a cliff, Kaoru Yosano, Japan’s new minister for economic and fiscal policy, told the FT last week that Japan had hit a “critical point” where it risks losing investor confidence if politicians failed to agree on curbing the ballooning national debt. Read more