The Chart That The BoJ Is Most Worried About (And So Should You Be)

Tyler Durden's picture

Until the last few days, the attention of the mainstream business media has been on how 'wonderful' Japan's policy prescription must be since its stock market is soaring at a record pace. The reality is that the far bigger JGB market has been crumbling. As we explained here, this is a major problem for the bubble-blowers, as the extreme volatility (VaR shock) that the Japanese Government Bond market has been through in the last few weeks has some very large and painful consequences, that as yet, have not been discussed widely. The term 'shadow banking' has been one ZH readers are by now extremely familiar with as we have discussed this as the panacea of unseen leverage (most recently in Europe and China) for years; the funding markets in Japan, so heavily reliant on JGB repo for short-term liquidity and the efficient functioning of two-way markets in the bonds, are hitting a wall. As JPMorgan notes, the number of JGB 'fails' - where a repo deal breaks down - has more than doubled in the last week. For a market that represents 40% of the total Japanese money-market, this will be a critical area to watch for a JGB waterfall.



Via JPMorgan:

The sharp rise in JGB volatility has not left the JGB repo market unaffected. The ¥80tr large Japanese repo market accounts for 40% of the total size of Japanese money market (which it also includes CDs/CPs, currency swaps, BoJ money market operations, and Call transactions) and it is an important lubricant of the JGB market. This is because repos with JGBs as collateral, account for more than 99% of domestic repo transactions. The haircuts are typically very low in the JGB repo market ranging from zero to 2%. This is because market participants are comfortable or accustomed to control risks through margin calls without often setting a haircut upfront.


But these margin calls or haircuts where applicable, tend to rise when volatility rises. And the rise in margin calls or haircuts has caused a rise in “fails”. 175 fails in the month of April represents a sharp increase from March but it is still much lower from the >1000 figures seen immediately post Lehman. A fail is a situation where a recipient of JGBs in a transaction does not receive the JGBs from the delivering party on the scheduled settlement date.


Typically the number of fails in Japan is quite small, partly because market participants try to avoid fails in advance, and because some market participants have never experienced fails. According to the BoJ, the situation is quite different from that prevailing in US repo markets, where fails occur much more frequently than in Japan and where market participants take action in accordance with the fails practice on a daily basis.


The retrenchment in Japanese repo market is then fed into the JGB market propagating the initial volatility (VaR) shock. The repo market is used by market participants for funding or short selling and its functioning is important in maintaining a two-way market for JGBs.

Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.
buzzsaw99's picture

just pretend everyone has the collateral they say they have and call it a day

knukles's picture

Absolutely.  What could go wrong?
One of the best treaties on disappearing collateral I've run across.

(Oh no, after you!)

gatorengineer's picture

Collateral?  How about these CDS's on MBS's?  or some Rehypothecated Greek Bonds?  I dont need no stinking collateral....

bank guy in Brussels's picture

Here is 'repo of collateral' in a fabulous 35 seconds of cinema

Tom Cruise getting his 'Collateral' briefcase back with a semi-automatic pistol

Superb clip (pun intended)

For those who have never heard gunfire on real city streets ... this is what it is really like :

buzzsaw99's picture

jabba wants to know why he must pay 50,000

because the bounty hunter is holding a thermal detonator as collateral, that's why.


this bounty hunter is mind kind of scum... [/jabba]

TeamDepends's picture

Our spidey sense is tingling off the charts.  Anybody else think we will get some "game changing" news next week?

auric1234's picture

Option expiry next week. COMEX default around the corner?


TeamDepends's picture

Bingo!  That rumbling you hear is Phyzz moving from here to there, vault to truck, truck to waiting nervous wealthy hands...

Caviar Emptor's picture

We regret to inform our subscribers that there is no more gold. For further information please dial the suicide hotline, you're on your own amigo. 

Dead Canary's picture

Hey fellers, don't look now but I just saw Bernanke, Geithner and Obummer at the airport wearing wigs and mustaches boarding a plane to the Bahamas!

JLee2027's picture

HKMEX didn't default, they just cash settled. COMEX will do the same. It will never be an announced default. One day they will simply close, mysteriously.

Go Tribe's picture

So basically the owners are saying "We're ready to retire to Florida and we're going to have a fire sale of our inventories and close our doors. It's been very nice doing business with you all these years, but time's running out and it's 5 o'clock somewhere."

Is that pretty much it?

auric1234's picture

So the MSM won't call it a default, but in here at least we can call things by their names. If they're unable to deliver money and instead offer you some worthless paper, that's a default.


HungryPorkChop's picture

HKMEX is busted.  Now we'll see the SHTF.  Time to call back in another Corzine to save the system.


auric1234's picture

Makes me wonder, what are the Japanese sheeple putting their savings in? US treasuries?


auric1234's picture

They buy mattresses? Or they put something inside.

If they put something inside, are they foolish enough to put yen in it?

I don't think they're massively buying gold. We'd have noticed by now.


Hulk's picture

The japanese repo market, coming soon to a sovereign near you !!!

Gotz Gold ???

alphamentalist's picture

Having done my time in the ‘Land of the Setting Sun’ I can tell you first hand how batshit-crazy in-your-hair-annoying avoid-at-all-costs a fail is (even if you are just tangentially involved). In the unfortunate event of a fail you are pestered incessantly by the mid/backoffice people and their managers (who are presumably harassed by higher managers and regulators) from about 1 day before an expected fail until it is resolved. It is cultural. Anything that can be measured and declared a success or failure is monitored and made into a point of institutional obsession. Having lived on the edge of a few of these I am shocked that they happen at all. They are that bad. Given that stigma and hassle, a spiking number is a HUGE warning sign.

knukles's picture

Talk about fails...
About 3 or so centuries ago I was a portfolio manager at one of the larger trust departments in the US and the bank had custody responsibility for a large number of state and local depository accounts which had to have a specific amount of US Treasury bill collateral set aside for security purposes.  Was just the contractual practice at the time (Today they're probably taking Spider-man towels) 
So one day I got a call from the custody area asking me to purchase some t-bills for cash (that day) delivery.... which I made damned clear to the 3 or so firms I went to asking for the offering... Y'all gotta make delivery today, folks, its for a state collateral account.
So Salomon Brothers (how many of you never heard of them, eh?) has the most competitive offering and I said it as a done predicated upon having the stuff in hand, cash settlement.

About an hour later just as the Fed wires closing, the custody folk tell me no gots.  I call Solly back... no gots.  I said the deal was for cash.  They say too fucking bad.
I said it was for cash.  I'd made ta clear.
They said go fuck yourself (We ain't got 'em so we can't make delivery, so tough knobs, Knukieboy)
So I told them I'd buy their sweet little asses in.  (Meaning I buy at whatever price necessary to get deliver today, they pay the difference)
They told me good luck, no can do because nobody'll have the bills.
I said that I'd buy in at 105 and betcha I could get a whole fucking bunch.
They materialized out of thin air ... real quick
The bill trader wouldn't do business with me for a long time. 
He went on to being an influential government figure.

Go figurel....

Obadiah's picture

It is trueley fiat money that makes all that type of shit successful



realtick's picture

we're going down together, but japan is leading the way

Lands Of The Setting Suns

Kiwi Pete's picture

There's only 3 reasons for a fail. No stock (unlikely in the JGB market in Japan one would think), instructions don't match (you've got your unmatched trades report to give you 3 days to match the trades. Should be 100% possible.) or counterparty No Cash. I wonder which it is? lol

ChaosEquilibrium's picture

Nikkei down 3.3% on open?.....or am I getting bad data feeds?  Anyone verify!!

Yen Cross's picture

    Nikkei CFDs

Japan NI225    14,318.00    14,568.00    14,628.00    14,098.00    [-250.00 ]   -1.72%    22:03:0

flyingpigg's picture

Funny thing is they show green arrows if market is down and also the negative delta is printed green on the large screens. If market goes up they use red. Is it something cultural?

Headbanger's picture

Again, this is all well and good but the "horses are already out of the barn", the ship has hit the iceberg..  It's now too late to say why and how it happened but rather to try and plan ahead for the economic implosion dead ahead.

Michelle's picture

What is the point of pointing out these fails? More failures in the U.S. makes Japan's seem rather benign.

Furthermore, 4+ years and counting and no big bang. What's the point of all these articles when the governments and the central banks keep saving the day? The CB's would love nothing more than the likes of Kyle Bass to disappear into a black hole.

Heeding all these warnings has been horribly costly from an opportunistic standpoint for almost every ZH'er over the past 4 years and nobody can predict when the bell tolls.

Start the mudslinging comments - I always laugh at you fools.


M2Market's picture

Sure, the goverments and CB's keep saving the day so why not start start selling those knock in swaptions 5 sigma from the mean to earn a few basis pts?   The Maginot line is defended by the BOJ and MOF and it is unbreakable, so this is only the rational move isn't it?  . 

besnook's picture

so you think zirp can lzst forever? while it has lasted seemingly forever in japan abe has set the stage for it to end. the end ironically comes in the form of rising rates which, in the old real reality used to mean the economy was heating up and money should be rotated into stocks util the bond market signalled the economy has cooled at which time money should be cycled back into bonds. life was simple back then, like you.

now the only real thing the low rate means is the economy sux. the next real thing you will see is rising rates suck worse. you sound like you will be needing knee pads......and i hope you don't bite.

Yen Cross's picture

     The Japs are going to ignore their JGB problems just like they did with their R/E market in the 90's . We saw how that debacle ended.  Gold gapped up nicely on the open.

ISEEIT's picture

They'll attempt to 'paper' it over right?

This is gunna be ugly but WTF? Fun to watch how Krug and the other ministers of BS spin it...

Further down the rabbit hole we go!

q99x2's picture

You mean it might not matter that the Democrats (think Dianne Goldman Berman Feinstein [that's Feinstein's full name and just 1 not 4 crooks)] brought California's budget to a surplus?

fonzannoon's picture

You guys should all do an experiment. Get hammered from this minute until the U.S open Tuesday am. Don't look at the market, don't read updates here. When you wake up from your drunken coma Tuesday pre U.S open the Japanese yields will be right around where they are right now and their equity markets will be very close to where they are right now. Anything between now and then will just be drama pushed under the ever growing rug,

Thomas's picture

One thing I DO know is that carnage in Japan will clouds of toxicity our direction.

DanDaley's picture

Ry Cooder is just soo good.  Thanks for reminding me...and that is/was America.

bugs_'s picture

has someone figured out how to naked short tons of JGB?

They Tried to Steal My Gold's picture

Long time ago....I handled overnight Repo's and Drexel was my account. Was called in the middle of the night - Drexel has gone BUST



Paracelsus's picture

Years ago a trader at SIMEX,Nick Leeson,tried to trade himself out of a hole betting on the rise of JGB's. He kept doubling down,and then doubling down again.25k of contracts for 25k each (Bonds).He was able to hide his screwups by telling the office girls to put the losses in the "five eights" account(88888),an error account.The trouble was he was trading and settling as well,usually two different people do these functions (front office,back office).End result was the implosion of the UK's oldest bank,Barings. Funny thing was he thought the Japanese Gov't "just had to do something after the Kobe earthquake had toppled the freeways,etc.".The Japanese Gov't did sweet F.A. for months as bureaucratic inertia set in big time.But the hilarious kicker was the fellows in London were argueing about their golden handshakes until the eleventh hour,when the Bank of England rep kicked in the door and yelled "TIME". Sold to the Dutch for $1 (ING).Oddly enough Barings had to get special permission to move such large amounts of capital overseas (special permission from the Bank of England).

ISEEIT's picture

What's "odd" about that? The fact that you just told us? Dirty closets really are kinda like last era, ya know?

Money 4 Nothing's picture

And this is why.


Have a great non trading Monday.

WAMO556's picture

The Chart That The BoJ Is Most Worried About (And So Should You Be)

I have read the body of this post several times, since the titles said that Japan's capitulation would effect me (the ROYAL ME)

Maybe I just don't see it, but so what and who cares of Japan falls of the market. It's not like they actually make anything anymore.

Maybe I am missing something. But I don't think so.