Japanese Finance Ministry Warns Surge In JGB Volatility May Lead To A Sharp Bond Selloff

Tyler Durden's picture


If Friday's session is any indication of what to expect in a few minutes when JGB trading resumes, we are about to have a doozy of a session on our hands (especially with Interactive Brokers already announcing all intraday margins on all Japanese products for Monday trading have been lifted). As a reminder, the 10Y JGB suffered only its second most volatile trading day ever this past Friday when the yield plunged by half (!) to 0.30%, then doubled in a matter of minutes to 0.60% - a 13 sigma move - and the bond trading session was interrupted by two trading halts when it seemed for a minute that the BOJ may lose all control of the bond market. Well, judging by the absolutely ridiculous moves in the USDJPY as of this moment, with the pair soaring 70 pips in a matter of seconds, we are about to have precisely the kind of insanely volatile session that the Japanese Finance Ministry itself warned may lead to a wholesale selloff in JGBs, offsetting even the New Normal Mrs Watanabe kneejerk which is to merely frontrun the BOJ in buying JGBs. Why? Because with implied vol exploding, VaR-driven models will tell banks to just dump bonds as they have become too volatile to hold on their books. The problem is that with trillions and trillions of JGBs held by banks, insurance companies and pension firms, there just not may be anyone out there to buy them.

This is from the October 26, 2012 minutes of the Meeting of JGB market special participants, just as the insanity known as Abenomics was being first revealed to the world.

Another thing to be noted here is the fact that as a risk management method, many domestic financial institutions adopt the VaR approach, which is designed to calculate the amount at risk on the basis of volatility. Under the present circumstances, we can determine the amount at risk to be small because of not great volatility. But if the volatility moves up or down in the order of 0.5% to 1.5%, it will increase the amount at risk, forcing domestic financial institutions to reduce their JGB holdings.

0.5% or 1.5%? Try ten times that. The chart below shows the implied vol of the 10Y JGB in recent days. If any financial institution still adhering to a VaR approach hasn't puked its bond holdings, it will shortly.

Perhaps it is not, then surprising, that the one rhetorical question the MOF had was the following:

Here, we have one question. What will happen to interest rates payable on 15-Year Floating-Rate Bonds or Nonmarketable JGBs for Retail Investors in case the 10-Year Bond auctions are suspended?

Yes, what will happen if the BOJ has managed to literally break the bond market?


Away from the dramtic shifts in JGBs, the last 3 days have seen the 2nd largest weakening in JPY in 25 years...


...and most notably the relationship between JPY (as a funding currency for every and any risk trade around the world) has experienced a rather interesting transition change in the last month...

Green Oval = Normal: JPY weakness funds FX carry to buy stocks and thus bond yields rise.

Orange Oval = Transition: unwinding of those trades led to JPY strength...

Red = New correlation: the BoJ drops the shock-and-awe hand grenade and confirms JPY investors' concerns that their wealth is being destroyed - the Treasury buying begins and stocks get sold.

...or perhaps the 'strength' in JPY relative to EUR in recent weeks (the ultimate JPY carry trade) is now being squeezed back to reconnect with the US equity market


Perhaps the post-Lehman decoupling between USDJPY and the long-end of the JGB curve is back... which means JGBs imply 110 USDJPY is coming. Interestingly the collapse in the JGB curve took it back to the same time when USDJPY was here last - mid 2009...



Charts: Bloomberg

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Sun, 04/07/2013 - 18:23 | 3419784 cherry picker
cherry picker's picture

Sounds like a product I had purchased inventory for and tried to sell, envisioning millions and no one bought them.

I sold a few for pennies on the dollar, gave a few away and the rest ended up in a land fill somewhere.

Something tells me this will be the same for Japan.

Sun, 04/07/2013 - 18:38 | 3419834 gmrpeabody
gmrpeabody's picture

Too funny..., a person hasn't really lived till they been burned at least once like that. Once should be all it takes, if it happens again you need to take a serious look at yourself.

Sun, 04/07/2013 - 21:46 | 3420422 LetThemEatRand
LetThemEatRand's picture

Unless you're a bankster.  They get to fail over and over and over and over again.  On the 10th major failure, they move jobs and get a signing bonus from the new place and a retirement bonus from the old place.  It's good to be a bankster.

Sun, 04/07/2013 - 18:46 | 3419855 maxmad
maxmad's picture

Dont feel bad Cherry, Look at all these suckers still buying bonds and dollars..  They will both be at the landfill soon enough!

Sun, 04/07/2013 - 20:31 | 3420195 aint no fortuna...
aint no fortunate son's picture

Nikkei's up 369 points out of the gate, their algos must synch w/ Ben's algos

Sun, 04/07/2013 - 20:58 | 3420271 lolman
lolman's picture

were you owner of Atari?

Sun, 04/07/2013 - 18:25 | 3419794 holdbuysell
holdbuysell's picture

And scene....

Kyle Bass relaxing in a LazBoy, large bowl of freshly popped popcorn on hand...

Fade to black.

Sun, 04/07/2013 - 18:26 | 3419795 fonzannoon
fonzannoon's picture

yes yes (twisting evil mustache) our models say sell JGB's and buy those riskless treasuries instead (evil laugh)

"Here, we have one question. What will happen to interest rates payable on 15-Year Floating-Rate Bonds or Nonmarketable JGBs for Retail Investors in case the 10-Year Bond auctions are suspended?"

What happened to "bro knock those yields down and hookers and booze is on me" emails going back and forth. "Bro...I need this".

Those days are over? (sad face).

Sun, 04/07/2013 - 20:41 | 3420226 NoDebt
NoDebt's picture

They're not gone, they're just happening at the Central Bank level.

I bet whats-his-face, the "trader" at the Fed will be showing as "in the office" tomorrow.

Sun, 04/07/2013 - 18:25 | 3419796 Key-Rick
Key-Rick's picture

short bonds, long stocks, bitchez!

Sun, 04/07/2013 - 19:58 | 3420086 GMadScientist
GMadScientist's picture

you go, leroy jenkins!

Sun, 04/07/2013 - 22:14 | 3420520 RebelDevil
RebelDevil's picture

short bonds, short stocks, long silver, long gold, long bitcoin!

Are you forgeting Crash JPM, Buy Silver!?

If bonds crash, so does JPM (Due to the silver price exploding.)

They're all fucking linked!

Sun, 04/07/2013 - 18:27 | 3419798 Rusticus
Rusticus's picture

Confused ? ... isn't QE about the BoJ always providing a bid ?

Sun, 04/07/2013 - 18:27 | 3419805 ebworthen
ebworthen's picture

When does the Japanese bond market open again?  Later tonight U.S. time?

Sun, 04/07/2013 - 18:45 | 3419850 fonzannoon
fonzannoon's picture

I am surprised this thread has no action. This is the one we've all been waiting for. A developed country's bond market blowing up in real time. Or not.

Sun, 04/07/2013 - 18:51 | 3419864 Uber Vandal
Uber Vandal's picture

Perhaps the other distractions have worn everyone out from events that just may actually matter?

Sun, 04/07/2013 - 22:16 | 3420527 RebelDevil
RebelDevil's picture

Do people create their own "Red Herring" by paying attention to pointless shit out of boredom? (maybe....)

Sun, 04/07/2013 - 18:51 | 3419866 ebworthen
ebworthen's picture

Dinner time on the East Coast, Latte time on the West Coast.

Sun, 04/07/2013 - 18:53 | 3419869 McMolotov
McMolotov's picture

And many of us are busy figuring out what to drink tonight.

Sun, 04/07/2013 - 19:01 | 3419902 fonzannoon
fonzannoon's picture

Let me know when you get it sorted out. I have a feeling tonight is going to be interesting. I am going with beer.

Sun, 04/07/2013 - 19:17 | 3419948 Uber Vandal
Uber Vandal's picture

Once I turned 21, my desire to drink stopped for some reason. Probably because it was legal or something like that....

Sun, 04/07/2013 - 19:21 | 3419957 fonzannoon
fonzannoon's picture

I don't really get hammered anymore. Maybe a few times a year, at most. But a few beers or a glass or two of something a day is almost a requirement. It's my only vice, outside of gambling and some other stuff. So I allowed myself to keep it.

Sun, 04/07/2013 - 20:43 | 3420237 NoDebt
NoDebt's picture

You should take up smoking.  It's my last remaining vice.  Besides alcohol, coke and hookers.  And fucking swearing.

Sun, 04/07/2013 - 21:36 | 3420377 ebworthen
ebworthen's picture

God fucking damnit, pass the coke and the brunette!  And later I want a Gispert Churchill and some Cognac, then the redhead.

Sun, 04/07/2013 - 22:05 | 3420488 RebelDevil
RebelDevil's picture

I think the world would be much better off if weed was legalized, and tobacco was crimalized.
Toccabo causes cancer (and a expensive as shit healthcare system for treating it.)
While weed cures cancer (and as a result creating better health, and a cheaper healthcare system.)

Plus, THC is much more powerful than nicotine!
See, some drugs aren't bad like your 7th grade teacher will tell you! Though, some drugs are just as bad as AIDS too.

Mon, 04/08/2013 - 09:38 | 3421552 Key-Rick
Key-Rick's picture

I quit smoking January 1, 2007 and correspondingly increased my alcohol intake.  I plan to start smoking again on my 70th birthday.  Won't be enough time left for it to kill me.

Sun, 04/07/2013 - 21:33 | 3420381 ebworthen
ebworthen's picture

Gin martini's, shaken, one olive.  2 parts gin, 1 part vermouth.

Mon, 04/08/2013 - 09:54 | 3421607 L G Butz PhD
L G Butz PhD's picture

dats 1 WET martini

Sun, 04/07/2013 - 19:03 | 3419908 Global.Strawdog
Global.Strawdog's picture

Japan isn't going to blow up. Bernanke can't let that happen.  Toyota's for half price and US gov. financing auto loans?

To the presses, to infinity and beyond....

Sun, 04/07/2013 - 20:22 | 3420162 fomcy
fomcy's picture

Yeah, when those Paper crackheads going to realize that there is no better

currency/asset than GOLD/Silver. Zero Debt, Zero Liability,

Bernank-printing-press / Politician-Bullshit Free.

Well, they gonna find out sooner or later anyways..

Sun, 04/07/2013 - 18:48 | 3419860 McMolotov
McMolotov's picture

Considering how bass-ackwards things in this world have gotten, it's kind of fitting that the sunset of the Great Ponzi could begin in the Land of the Rising Sun.

Sun, 04/07/2013 - 18:51 | 3419865 adr
adr's picture

So that means the Japanese equity market takes out the all time early 1990s high right?

If Sony, Canon, Nippon Life, etc go parabolic all those Japanese holding trillions of yen in bonds will all be rich, once they are forced to liquidate the bonds for equity shares.

Yeah, Grandpa Nomura put a knife through his belly, and Grandma jumped off the roof. They're just making room for the younger generation. They don't hold any bonds after all. They'll plow all their earnings in Fuji Heavy and buy private Islands not claimed by China.

The new edit to Tropic Thunder says, YOU ALWAYS GO FULL RETARD. Sean Penn, I am Sam, went full retard, never got more praise. Fuck, my mom burnt down the kitchen making waffles, she's got a 160 IQ. The guys a genious, sued the manufacturer of the toaster oven for $10 million. Forest Gump, slow mother fuckin idiot, war hero? Hell no, he ran away when the shit went down. Sean Penn, I am Sam, would have run right at the machine gun, that's a hero.

Sun, 04/07/2013 - 19:25 | 3419978 Spigot
Spigot's picture

Yes, but the nominal value expressed as purhasing power value will be exactly the same as today. Same thing happened in Weimar Germany during the hyperinflation there - Equities went to the moon, but they actually stagnated in terms of purchasing power.

Sun, 04/07/2013 - 22:10 | 3420499 RebelDevil
RebelDevil's picture

And purchasing power is what REALLY matters! (because without it, then how does one eat and have shelter?)

Sun, 04/07/2013 - 18:55 | 3419883 beefman
beefman's picture

No action because bennie and the boys have already figured this one out as well.

 it must be a slow news day with the chidren dont belong to you article,  what a reach? 


Sun, 04/07/2013 - 19:02 | 3419899 buzzsaw99
buzzsaw99's picture

The BOJ and the Finance Ministry would love a panic. That way they could buy the bonds back cheap. It is a shakedown of foreign investors and I think it is hilarious.

Sun, 04/07/2013 - 19:02 | 3419910 besnook
besnook's picture

this is the knee jerk reaction. i wouldn't be surprised if japanese banks have their bots turned off and this is the response of whatever external money is in the market and the synthetic swap market. once that money has made their move the market will settle into a longer term trend. rising rates would mean more disposable money for 70 year old mrs. watanabe to help take care of her temp working grand kids so they can buy more anime stuff in harajuku and shibuya financed by the most sophisticated printing machine in the world block printing yen by the trillions.

Sun, 04/07/2013 - 19:04 | 3419913 mt paul
mt paul's picture

fat cats

do not eat sushi..

too much rice..

Sun, 04/07/2013 - 19:21 | 3419965 besnook
besnook's picture

basho is best

fat cat licking paws

a gust of wind stirs the leaves

the scent of flowers

Sun, 04/07/2013 - 19:58 | 3420085 GMadScientist
GMadScientist's picture

the wolves howl

abe bathes in de basement

loyal citizen

who will buy your paper?

Sun, 04/07/2013 - 19:11 | 3419936 Everybodys All ...
Everybodys All American's picture

Anyone figure out how this could impact the Yen carry traders trading the US stock market on the cheapening yen vs the dollar?

I imagine it will cause a run back into US Treasuries and an end to the Yen carry and a global sell off of stocks. A currency blowing up is never a good thing for the world to digest.

Sun, 04/07/2013 - 20:14 | 3420140 gatorengineer
gatorengineer's picture

did you see the US 10yr friday... Nuff said.

Sun, 04/07/2013 - 19:16 | 3419946 q99x2
q99x2's picture

Banks will get lots more taxpayer money (FED) on this one. Everybody happy until the ATMs quit working. 

Sun, 04/07/2013 - 19:43 | 3420036 rubearish10
rubearish10's picture

Ho wmany more Swans must fly to break this thing?

Sun, 04/07/2013 - 19:53 | 3420054 Clint Liquor
Clint Liquor's picture

For those looking for a timeline, remember Gordon T. Long's prediction:

First Europe

Then Japan

Then the USA



Sun, 04/07/2013 - 20:06 | 3420077 russwinter
russwinter's picture

Sunday evening trading  the yield spiked up again, recovered no doubt on BoJ intervention, then gapped back down,  while the Yen swooned hard again. It looks like an out of control kamikaze pilot.  A new and very different risk-reward Keynesian end-game regime is at hand.



Sun, 04/07/2013 - 19:56 | 3420078 GMadScientist
GMadScientist's picture

Financial Sumo!

Sun, 04/07/2013 - 19:59 | 3420089 Banksters
Banksters's picture

Between the fed, ecb, and boj, money printing and stimulus, isn't this all getting  fucking ridiculous.   

Sun, 04/07/2013 - 20:15 | 3420145 QuantumCat
QuantumCat's picture

Emerald City is beautiful... Pay no attention to the man behind the curtain.

Sun, 04/07/2013 - 20:21 | 3420163 rubearish10
rubearish10's picture

BTW, was able to Buy USD.JPY via IB today.....so what panic??

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