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Visualizing The 'Orderly' Japanese Bond Market
Overnight, Japanese government bond (JGB) markets had yet another turbulent trading session. Despite reassurances from Kuroda that the bond-buying plan would continue as expected, JGB prices (and even more so yields) smashed around in a huge relative range. The market is already extremely anxious of this disorderly behavior as Japanese interest rate implied volatility (used to hedge against - or bet on - disorderly markets) have spiked to ten-year highs (and to their 3rd highest ever). This is no surprise as the following charts show, the realized volatility in this market is at generational extremes.
Realized volatility has exploded...
as has Japanese interest rate implied volatility...
as daily ranges are 4 to 8 times ten year averages...
So we are one week into the biggest and most experimental monetization scheme ever in history and the quadrillion Yen bond market is in total disarray. What could go wrong?
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Let's buy PIIGS bonds instead. They are safe!
{dup. removed}.
Tis' the new Ab-ab-ab-bab-bab-bab-Abenormal.
Whose brain was it? Abby Normal. http://www.youtube.com/watch?v=yH97lImrr0Q
Clearly they aren't printing enough. We need MOAR
Signed
A clueless nobel prize winning bearded potato economist.
How dare you sully the good name of potatoes.
I guess ZH is intent on having all its followers miss the coming Japanese stock market explosion. Sort of like they have for the S&P since March 2009 here in th USA?
Not me. I'm not fighting these guys again. Sorry ZH.
10 year is still below 1, right? Their rates have been dropping since 1990, and will continue to. When Tyler warns everyone of doom, take the other side of the bet.
Real v. Nominal
Understand the difference and you wouldn't feel the way you do.
Im not getting the "experiemental" etc references...
dont we have weimer as a reference? Zimbabwe? etc?
let us all remember.. Ive been reading that this catastrophe was going to implode any minute now.. for 20 years... of course.. it could.. but they magically seem to infinitly kick the can...
fukushima is probably a faster appraoching lethality...
The buckets are certainly sloshing now.
Using the same linear logic as SP bulls from 666, this puts the 10y JPG at 8%-9% in 4 years.
The Japanese may 'win' this race or they may lose: on one side, the worth of the yen is set at Japanese gas stations all over Japan not in the offices of the Bank of Japan. Watch what happens when gasoline prices rise and drivers in Japan stop buying. Meanwhile, prices of export goods must follow the yen price of Japanese raw material imports particularly petroleum. From here it looks as if the Japanese easing gambit will fail because associated energy costs will be greater than any credit- or currency gains.
On the other side, if Japan actually 'wins' they will lose as the depreciation of the yen is actually a run out of yen.
What the bond market volatility indicates is holders of big blocks of Japanese government bonds dumping said blocks 'at the market'. When this happens the yields skyrocket.
When the BoJ steps in and buys the yields retreat.
Soon enough the BoJ will own the Japanese government's bonds ... not all of them but most overseas. In order for a country like China or Korea to dump yen they must first convert yen bonds to currency ... then they sell the currency (swap for dollars).
By way of this process dollars are vacuumed up around the world as the yen is/was a major reserve currency and central to many Asian carry trades.
If the Japanese establishment 'wins' it means the central banks can push energy prices at least for awhile ... until the high fuel prices do economic damage. At that point, the central bank(s) will become helpless again. If the Bank of Japan 'wins' it will mean it is insolvent because of excess leverage and that there is no effective lender of last resort, that all finance system liabilities are exposed to catastrophic loss ... there will be a run out of yen and the Japanese banks will collapse.
This sort of thing is what Kyle Bass has in mind when he discusses the 'problems' in Japan.