As The Japanese Government Pension Fund Announces Commencement Of Asset Liquidations, Will The Japanese Bond Market Finally Crack?

Tyler Durden's picture

In the world of bonds, few things have perplexed investors as much as the ridiculously low (and going lower) rates of Japanese Government Bonds (JGBs), at last check yielding 1.22%. Granted "deflation" in Japan has long been quoated as the key driver for the ongoing decline in real and nominal rates, but in practical market terms it was always the fact that there was a buyer of first and last resort, usually this being either Japanese citizens directly or their proxy, the Japanese Government Pension Investment Fund (GPIF) that kept yields in check and sliding. No one has been following the story of the perpetually collapsing JGB yield better than SocGen's Dylan Grice (for the best overview of this issue we suggest: "Upcoming Government Funding Crises: Japan Edition"). And while as Dylan has pointed out before, the direct purchase of bonds by the population has slowed if not reversed entirely (and in the aftermath of the March 11 earthquake we are confident many have entered run off mode - we will attempt to confirm as soon as official fund flow data is released), the GPIF has always been a buyer of last resort. Until now. Reuters reports that the Kyle Bass pain trade, which has for so long gone counterintuitively, may be about to pay off in spade. 

From Reuters:

Japan's public pension fund is planning to withdraw about 6.4 trillion yen ($78 billion) from its assets in this financial year to cover a shortfall in pension payouts, the Nikkei business daily reported on Sunday.

The Government Pension Investment Fund (GPIF) holds assets of about $1.4 trillion, larger than both the Canadian and Indian economies, and is a major force in the Japanese government bonds (JGB) market, where it parks two-thirds of its assets.

And if one isn't buying, it means that one is...

The GPIF is likely to raise cash by selling JGBs and other assets in its portfolio as pension contributions and tax income continue to fall short of pension payouts which are growing as Japan's population ages, the newspaper said.

For the financial year that ended in March, the GPIF withdrew about 6 trillion-7 trillion yen to cover the shortfall, the Nikkei said.

This financial year, the fund plans to secure about 4.7 trillion yen for the purpose by not reinvesting money redeemed from JGBs coming to maturity, and raise another 2 trillion yen by selling stocks and bonds, the Nikkei said.

Think of it as the US Social Security Trust Fund, which as of last year is in a net cash losing position. Ironically, the demographies of Japan and the US may not be that different. And as liquidations start to fund cash pension obligations, it merely raises another key question: who will just buy all this debt coming to market? In Japan, the answer is unclear, but the banking cartel is hoping it can collude enough for the market not to notice that the long-term bid is about to migrate to the BOJ, as another country succumbs to that terminal phase of the Ponzi unwind.

The GPIF has asked trust banks and others for advice about
how to lessen the market impact of its asset sales, including
the possibility that the fund might secure 2 trillion yen by
bank lending to finance part of the payout shortfall, the Nikkei

We are confident the Japanese banking system, which is now predicated upon the assumption that the 10 Year JGB has to trade inside of 1.5% will do a quick cost benefit analysis and realize that they will do anything it takes to prevent the truth from coming out, namely that the core holder (not  marginal) of Japanese debt is now in run off mode. And with the Japanese population one of the oldest in the developed world, Dylan's prediction from 2010 (and before) is about to come true. And what Reuters ignores is the far more important implication for US paper that this catalytic event forestells:

is far from just a JGB market problem. As Japan's retirees age and run
down their wealth, Japan's policymakers will be forced to sell assets,
including US Treasuries currently worth $750bn, or Y70 trillion "eight
months" worth of domestic financing
. At nearly 10% of the outstanding US
Treasury stock, this might well precipitate other government funding
crises (bearing in mind that the Japanese model is the argument
buttressing confidence in Western government bonds in the face of
deteriorating fiscal conditions). At the very least I'd expect it to
trigger an international bond market rout scary enough to spook all
other asset classes.

So, about that QE ending...

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plocequ1's picture

Tyler, this is far too big of an issue for us " Little " people to confront. Leave it to The Benmeister to take on. He makes the big bucks

bugs_'s picture

bank lending to cover the shortfall instead of selling "assets" - "assets" for which there is no buyer.

TIMMAYYY's picture

there is always a buyer...just a matter of price.

imapopulistnow's picture

Exactly.  Take Greek bonds for instance...

bluestaq's picture

"This financial year" means between now and March 31, 2012.  Given this I doubt the Fed tightens policy anytime soon, and may loosen further if things hit panic mode between now and then..I shudder at the thought. 

falak pema's picture

The trouble with a inherently bubble financialized, interlinked, world economy is the momentum generated and then magnified by resonance of speculative liquidity plays that can start a run on a perceived short sell opportunity in bond market; whose ripple effect can bring the whole house of cards down. Unstable equilibrium is Benocide's nightmare. No amount of fiat paper pumping can hold back certain mad stampedes from taking us all over the cliff. 

Japan's economy is a case study of frightening complexity. Caught between the hard rock of huge accumulated debt and the obligation to feed by asset selling the rebuild/import commodity/export finished product cycle that is now apparently hard/fatally(?) hit by nuclear disaster whose magnitude/fall-out is still not understood in social/economic terms.

The third economic power house in world...another black swan. 

WonderDawg's picture

"No amount of fiat paper pumping can hold back certain mad stampedes from taking us all over the cliff."

This goes to the heart of the impending collapse. The herding impulse is a primal instinct and though there will be a few rational people standing on the sidelines screaming, "Wait, stop, this is madness!", this instinct will not be denied. When panic strikes, which could happen at any time, the ensuing chaos is going to be epic. The whole world is set-up for an epic collapse, from the U.S. to Europe to the Middle East to North Africa to Asia.

I also think, for reasons I can't really put my finger on, that the Black Swan everyone seems to be looking for is really a flock that's already in flight, and rather it will be some seemingly meaningless event that ignites the panic. It will seem benign at first, but a realization will be reached in a critical segment of the population, and that will be the tipping point.

I'm not smart enough to predict what it will be, but I think it's coming sooner than later.


redpill's picture

If Japan didn't set it off, God knows what it will take. But sometimes these things are entirely unpredictable and a seemingly small event can be greatly magnified. Think Archduke Ferdinand. Who will fire the proverbial shot in the bond market that sets off the World Sovereign Debt War?

ibjamming's picture

IF peak oil is true...WW III will soon start in the ME.  That's your black swan...a REAL war...a crusade, to take back the "oily lands" from the Muslim's who want to withold it to destroy "our way of life".


It will cause "austerity" and all kinds of bad shit.  It will give them an excuse to "reset" everything.  We lose, they win.

anonnn's picture

...seem benign at first...

Like remote-controlled drones for international assassinations, anywhere/anytime, as legal government policy?

With no repercussions? Like resonance?...Action/reaction? Insanity surge?

With no unintended consequences?...aka a Black Swan.

disabledvet's picture

there are so many "interested parties" with sovreign debt of all "stripes and colors."  still the price of gold doing nothing but going up says to me "not all is well in mud-ville."  gold is money in the sense that it works BETWEEN COUNTRIES and not just as "something you and I use to take it to the man" for lack of a better way of expressing it.  In this sense a breakdown in the treasury complex is what we need in order for gold to "start adding zero's" as "trade itself is not going to collapse" but in fact will probably become the rational choice for keeping global trade flows flowing once fiat money is rendered secondary to barter by a hopelessly corrupt poltical class and it's "fiat debt."  I am keeping an eye on oil and whether it "soars to the point of a breakdown of the treasury debt regime."

A Man without Qualities's picture

At a minimum, oil prices will remain in line with gold, but I stress, at a minimum.

As for Japan, they have a total funding need of nearly 50% of GDP this year? The need to pay for the mountain of maturing debt, the additional business as normal deficit plus the reconstruction effort, plus nuclear crisis. Therefore, they will print, the US will print, every fucking over-indebted nation will print and the Chinese will keep cranking out the liquidity in order to keep up in the race to secure real assets as fiat currencies descend to zero.

disabledvet's picture

market for gold:  "nothingburger."  market for oil:  JUPITER.  You hesitate in Libya?  You die.

anonnn's picture

As for gold, it comes down to... who/what can you trust as the fruit of your labor?

Trust is dependant on transparency and predictability [certainty].

Modern invisible bankers [you only know their frontmen] and their invisible "banking" schemes ["Trust me. I your friend. Sign here."] are a miserable departure from the proverbial local goldsmith, whose family are known to the community back several generations...and by actual demonstration is most unlikely to suddenly wander off with your fruit.

Alas, trust suffers from 2000 years of progress.

scatterbrains's picture

this is a non event,  Mr Jeetner said back in March not to worry, that Japan wont be selling any U.S. debt.

holdbuysell's picture

Uh-huh, I'll put his comments in the same bucket with the 'subprime is contained' comment.

Leo Kolivakis's picture

Go back to read my comment on the GPIF worried about public debt:

With all due respect to Kyle bass, every hedge fund manager who shorted JGBs got slaughtered since the late 1990s. One senior pension fund manager explained to me why he's still long JGBs and thinks these hedge funds have not done their homework. And no, I won't share why!!!

cossack55's picture

Are you familiar with water boarding?

disabledvet's picture

i recommended going long Greek debt "as takeover trade" last March when the collapse occurred.  The German bailout came "and that was the time to exit that trade" as not only Greece but the other so called PIGS have been "slaughtered" in the name of euro.  Now it would appear that Greece is in need of another bailout--on the order of trillion give or take?--and i think a good argument can be made that this bailout is a must as it is do or die for the European Union itself should if fail to deliver.  Needless to say "bid for gold" on this point alone.  Fukushima?  Libya?  "Sauce for the goose."  Not even the media can "glob over it."  Of course leave it to Zero Hedge to give us "just the facts, maam."  All the rest of us need to do is "give Zero the numbers."

masterinchancery's picture

A fund manager is still long JGBs payiing 1.5%, in a country where the death rate FAR exceeds the birth rate? Why?

jtaskinen's picture

It is pretty good idea to short all EU, some funds have for a long time made long term bets on collapse of euro-dream.

Might be a good idea but how to do?

At the end - burn baby burn (quote: some Enron trader who avoided interpol though)

disabledvet's picture

why short anything when all you need to do is go long gold (physical and GLD?), oil (the commodity) and natural gas stocks?  unfortunately the "good old days" when you could short stocks and not pay any taxes are over since even Greenspan and Co thought that "excessively greedy" due to the 90's--so that "benefit" is lost.

Cruzan Stomp Revival's picture

We are confident the Japanese banking system, which is now predicated upon the assumption that the 10 Year JGB has to trade inside of 1.5% will do a quick cost benefit analysis and realize that they will do anything it takes to prevent the truth from coming out, namely that the core holder (not  marginal) of Japanese debt is now in run off mode.

How soon will we go from Bovine-like complacency over long-term rates to sheer panic from TBTF banks everywhere? From quadrillions in interest rate derivatives to mismatched funding/loan maturities, these TBTF assholes have built a Dr. Strangelove doomsday device and no one knows where the timer is.

I think James Kunstler is onto something when he keeps hammering at the over-complexity of modern society. Things as simple (and reasonable) as letting interest rates find their market equilibrium are unthinkable today because it could blowup the entire financial system worldwide. And no one knows where that threshold is really. We'll all wake up one day and find that it was crossed because the global ponzi resembles a Baghdad utility pole and someone disconnected a wire somewhere that blew a transformer.

This might be it right here.

americanspirit's picture

Two maps of possible interest here

1. A map of the locations of Japanese nuclear power plants

2. A map of the major fault lines in Japan

These two maps pretty much tell the tale. There won't be enough money in Japan, in the pension funds or anywhere else, if/when another of these "down by the seaside" plants gets hit.

Stormdancer's picture

It probably won't be long before Fukushima forces its way back into the news cycle even apart from any new activity.  That mess is still teetering at the edge of a cliff.

tom a taxpayer's picture

Denial and docility about the unfolding and far from finished crises (economic, nuclear, earthquake/tsunami, debt) have kept the lid on the building pressure cooker in Japan. But when it blows, look out.

Bazooka's picture

Elliot Wave shows that March flash crash for Nikkei was a minor wav 1 down, currently finishing wave 2...which means wave 3 down will commence.

Deflation is ravaging Japan and it will also in USA. During deflation, everyone runs to the safety of gov. T bills or equivalent. The rates will go lower for Japan...perhaps 0.25% from current levels, despite pension fund selling.

USA will also see the rates plunge as this current reflationary period comes to an end and the overarching Deflation re-commences.

Silver Bug's picture

US debt is a ticking time bomb. People retiring shouldn't be putting there money in US Treasuries, they should be shorting them. They will have a much better retirement.

tmosley's picture

Ok, so 2/3rds of their assets are in JGBs, what is the other 1/3rd?  I was kind of thinking they would hold a lot of treasuries, no?

tom a taxpayer's picture


To solve the problem, the Japanese government has a secret project: cloning millions of new Mrs Watanabes.    Since there are no plans to clone Mr Watanabes, this could be a good opportunity for foreigners who always wanted to marry a nice Japanese lady.


Urban Redneck's picture

As pathetic as GPIF's diversification strategy may be- it is more desirable than the US equivalents.

Everybodys All American's picture

My bet is that Bernanke will be there to back stop. Can we just send him to jail or do we have to have a trial?

disabledvet's picture

from Samurai bonds to Samurai swords.  Keep blaming the warriors phuckers.

Arius's picture

ohhh...common can't leave us hanging in there now that you told us you know why....

this is bigger than your hedge fund meister my man...kyle bass like the clock will be right twice but thats all he needs....

slewie the pi-rat's picture

one never knows which straw will break the camel's back.  BOJ has been printing 24/7 and the US seems to be backing the japanese, perhaps b/c we are joined at the hip, debt & economy-wise.  they have just spent 6 weeks getting the liquidity bath ready for this liquidation.  i don't think the "reason" really matters (retirees).  jeeeez!  just look at the place!  and here we were just treated to that bankster bullshit abt mrs. watanabe being all hooked up, leveraged-long, no less, on these same bonds!  LOL!  what a crock 0' sake!

the comments here are pretty cogent, except for freaking leo, of course.  yep.  3rd largest nat'l economy on the planet, here.  W_Dawg speaks of the swans already aloft.  my mother used to say, "The chickens are coming home to roost!"

hi, mom!  happy easter!

buzlightening's picture

TIMbbbeeeerrrrr! Japan the tipping point. Dump USTbonds insures QE to infinity. How much in EU bonds Japan hold? Timber. It's a crashcading effect of paper fiat financial collapse which cannot be stopped. It will precipitate; accelerate all fiat currencies race to zero. DILUTION! It's all in the 1st grade math, as Japan the 3rd largest leg in the 3 legged stool of global econophile. Should say 3 stools of piles of shit, debt based currency created. It all falls down!

Arch Duke Ferdinand's picture

The US/Canada will go Protectionist and close its borders.

Elsewhere aroun the world...Gold Oil Silver will be sold for Food.

RobotTrader's picture

I guess these are going to turn into Roman Candles....

slewie the pi-rat's picture

i've already said i think the dollar has been doing prat-falls for the yen, since the tsunami et. al.  japan is printing to the max and getting away with far.  i think we've been seeing the bankster-choreographed version of The Mikado, RT.

also, did we see the PPT test-driving the post-75 dollar last week?  i think so.  japan is gonna need to do some liquidating.  nothing to see here.  orderly markets.  just move along, please...

thx 4 the yen charts.

buzzsaw99's picture

the bernank wipes his ass with $78B every morning. Bitchez.

ivars's picture

Some ideas on silver crash - or moving into new price territory and new stable gold/silver ratio?

russwinter's picture

Japan's population pyramid over time: the House of the Falling Sun

Supporting all that debt with old people and a 0.9% annual decline in working population is a deadend formula. 

anonnn's picture

I have read thru this thread...

Globally, TPTB have internecine spats, but will not ever go quietly into the night...any more than they will give up their privileges.

Emperors, Czars, Kings, Queens, nobles, royalty are still around...and still the scourge of Mankind.

A sense of community is their ruin, and TPTB clearly know it.


bruiserND's picture

Davis at Hinde Capital last October predicted that this event was the trigger to the end of all global fiat currencies.

27 pages is too much for most. Not me.


Get right with God

slewie the pi-rat's picture

really?  what event? 

As The Japanese Government Pension Fund Announces Commencement Of Asset Liquidations,

that one?  i don't do too many links, and we already take responsibility for ourselves, here.  really.  even on easter!  happy easter! or passover, or whatever you are celebrating!  have a wonderful day!

hardcleareye's picture

I enjoyed the read, thank you for the link.

I am not sure I concur with the conclusion based on the reasons in this letter. The main argument is that

a: the Japanese will default on their debt (this I agree with, the arguments are very persuasive and that was before the current tsunami and Fukushima meltdown),

b: Japan will experience hyperinflation (this is possible and probable)

c: Conclusion: these two events will result in a "global currency" based on gold reserves.  Gold prices could go up to $13,000/oz....

The jump from b to c based on the arguments in this letter, is nonsensical, (to many variables that are not addressed in this letter to credibly draw the conclusion reached in c).



SumSUN's picture

I need somebody to tell me what TPTB stands for.