"Liquidity Is Becoming A Serious Issue" As Japan's Bond Market Death Goes Global

Tyler Durden's picture

While we noted last week the death of the Japanese bond market as government intervention has killed the largest bond market in the world; it is now becoming increasingly clear that the dearth of trading volumes is not only spreading to equity markets but also to all major global markets as investors rotate to derivatives in order to find any liquidity. Central planners removal of increasing amounts of assets from the capital markets (bonds and now we find out stocks), thus reducing collateral availability, leaves traders lamenting "liquidity is becoming a serious issue." While there are 'trade-less' sessions now in Japanese bonds, the lack of liquidity is becoming a growing problem in US Treasuries (where the Fed owns 1/3rd of the market) and Europe where as JPMorgan warns, "some of this liquidity may be more superficial than really deep." The instability this lack of liquidity creates is extremely worrisome and likely another reason the Fed wants to Taper asap as DoubleLine warns, this is "the sort of thing that rears its ugly head when it is least welcome -- when it’s the greatest problem."


As Bloomberg reports,

Japan's bond market is dead... and so is its stock and FX markets...

The Bank of Japan’s unprecedented asset purchase program has released a creeping paralysis that is freezing government bond trading, constricting the yen to the tightest range on record and braking stock-market activity.




“All the markets have been quiet,” said Daisuke Uno, the Tokyo-based chief strategist at Sumitomo Mitsui Banking Corp. “We’ve already seen the BOJ dominance of JGBs since last year, but recently participants in currency and stock markets are also decreasing as those assets have traded in narrow ranges.”




The flows on both the buying side and selling side continue to fall,” said Takehito Yoshino, the chief fund manager at Mizuho Trust & Banking Co., a unit of Japan’s third-biggest financial group by market value. “Falling volatility is a very serious problem for traders and dealers who are unable to get capital gains.”

The US is getting that way as the Fed owns one third of the market...


and the world shifts to derivatives trading to find liquidity...

The boom in fixed-income derivatives trading is exposing a hidden risk in debt markets around the world: the inability of investors to buy and sell bonds.


While futures trading of 10-year Treasuries is close to an all-time high, bond-market volume for some maturities has fallen a third in the past year.


And Europe is not much better...(via Bloomberg)

Some cracks emerged in Europe last month, when investors dumped Italian, Spanish and Greek debt on speculation political parties opposed to the European Union would gain seats in parliamentary elections and derail the euro area’s recovery.


As the selloff intensified and liquidity decreased, the disparity in yields of 10-year Italian bonds between buyers and sellers based on bids and offers doubled to 6 basis points, or 0.06 percentage point, on May 23, the highest this year.

Market participants are growing increasingly weary...

“That has to bite and prevent dealers from supplying the balance sheet they did in the old days,” Gregory Whiteley, who manages government debt at Los Angeles-based DoubleLine Capital LP, which oversees about $50 billion, said by telephone June 10.




“Liquidity is becoming a serious issue,” Grant Peterkin, a money manager at Lombard Odier, which oversees $48 billion, said in a June 11 telephone interview from Geneva. The worry is that when investors try to exit their positions, “there may be some kind of squeeze.”

As we warned previously, these are phantom markets...

“It’s the sort of thing that rears its ugly head when it is least welcome -- when it’s the greatest problem.”

And is forcing traders into the derivatives markets...

As bond trading has slumped, the notional value of over-the-counter contracts soared fivefold in the past decade to a record $710 trillion, based on the latest data from the Bank for International Settlements compiled by Deutsche Bank AG.




Volume on Italian futures, which give buyers the right to purchase the nation’s debt at a future date and price, has soared more than 800 percent since trading of the contracts began in 2009, data compiled by Bloomberg show. By contrast, average daily trading in Italy’s $2.43 trillion market for government bonds, Europe’s largest, has tumbled 57 percent in the past decade, according to the Ministry of Finance.




For 10-year note futures, a total of 140.4 million contracts have traded in the first five months of the year, approaching last year’s total of 149.8 million, the most on a year-to-date basis going back to 2007, according to CME Group Inc.


Weekly trading of Treasuries with maturities between seven years and 11 years has fallen to $96.3 billion, a 32 percent drop from a year ago, data compiled by the New York Fed show.


“This is a global phenomenon,” Yvette Klevan

No one knows how badly this will end...

“There is risk that people won’t be prepared,” Richman said by telephone June 9. “The move in yield could be quicker and more dramatic than it has in the past. That’s something we are on the lookout for.”




“Investors in Japan assume that the BOJ will continue to buy JGBs vigilantly next year and the year after,” said Makoto Yamashita, the chief Japan rates strategist at Deutsche Securities, a primary dealer. “They take it for granted they can sell those bonds bought expensively to the BOJ as more and more notes disappear from the secondary market. It’s too frightening to think what might happen when the BOJ tapers.”

And with that not only have the central planners broken the largest and historically most liquid markets in the world but have forced investors into leveraged derivatives positions (in order to find liquidity for their exposure-seeking) which themselves are entirely over-promise (relative to the underlyings) and under-collateralized with any quality collateral. As we concluded previously...

Assume tomorrow the real black swan appears and all the liabilities: traditional and shadow, promptly demand collateral delivery. Well, the $11 trillion shortage would mean that risk values of, for example the S&P, would be haircut by a factor of, say, 75%. Or back to the proverbial 400 on the S&P500.


Still think owning real high quality collateral, not of the paper but of the hard asset variety such as gold, is a naive proposition, best reserved for fringe lunatic, tin foil hatters and gold bugs?


Go ahead then: sell yours.

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LawsofPhysics's picture

Bullshit.  Liquidity is not the problem, solvency is...

El Vaquero's picture

Water is the universal solvent, and if the spice does not flow, a lot of people will be wishing that they had a stillsuit.


investors rotate to derivatives in order to find any liquidity.

Tick-tock, motherfuckers.  Let us see if humanity is stupid enough to allow a bunch of numbers in various (electronic or otherwise) ledgers to seize up the physical economy.  I'm betting that at some point, the answer will be yes, we are that fucking dumb.

Headbanger's picture

I said there would be a liquidity crisis here several times before and here it is!

Cognitive Dissonance's picture

Liquidity as far as the eye can see, but not a drop to drink.

LawsofPhysics's picture

Indeed.  There simply is no political, fiscal, or monetary "solution" to scarcity...

same as it ever was...

Headbanger's picture

Worse than that.  No rehypothecation now either in China and most likely here as well means all the loans built on top of it are worthless.

And so the much feared "Black Swan" has become a "Black Pterodactyl" now!!

garypaul's picture

ok smarty-pants, can you explain why the SP500 et al keep going higher? Any timing of when it finally ends?

ThroxxOfVron's picture

"There simply is no political, fiscal, or monetary "solution" to scarcity..."

The Neo-Keynesians and Chartalist/MMT whack-jobs ALL seem to believe that printing money somehow makes the trees fruit, oil pump and refine itself straight into SUV gas tanks, and change falling snow into buckets of hot fried chicken.


OTC Off Balance Sheet Bond Derivatives Complex = Counterfeiting Treasuries.  

Government "Full faith and credit" for delivery of thousand-fold multiples of the entire historical GDP of the Planet?


For laughs:





CheapBastard's picture

No liquidity ... no flow ... no trickle down.


Joe 'The Plumber' has not bought jack this Spring as the recession deepens and he's struggling to feed his offspring, pay his mortgage for that overpriced 5,200 sf McMansion, property tax increases, home insurance, pay for an iCrap Gadget for each little Johnny and Mary he's sprouted, and a Big Screen TV in each room including the kitchen. Sales for this last Father's Day were the worst on record the local dept store guy said.

Amish Hacker's picture

Right again, CD. Plenty of liquidity as long as the need for it isn't too great. When true desperation sets in, liquidity will vanish. We've seen this before. Anyone care to wager that the US dollar and UST's will catch a "flight to safety" bid to the moon before this is over?

NoDebt's picture

Next move- outlaw the demanding of collateral obligations.  Simple fix.... for a central planner clinging desperately to the staus quo.  

Cognitive Dissonance's picture

Joe Weisenthal says we should get rid of 'cash' so that the central bank can more easily enact the 'appropriate' economic policy...or in this case negative interest rates. You simply must read the entire short article to truly appreciate the group think.


disabledvet's picture

Phucking tool. These phucking Jews never quit.

They want all money to traced "back to the source" and these war mongering psychos never change.

There's so much carry is this markets it really is amazing the Dow isn't at 25,000 right now. "So they offer Their Fuhrer an option."

Eliminate cash "because that undermines the regime" (when really it doesn't allow a "who's got and who's not" information flow.)

You're not paying for anything when you eliminate cash you Government morons!

Interestingly "Wells Fargo is now the largest Bank in World History"!!!!


"You eliminate cash and that thing goes kaploooey just like Citigroup."

Never saw a bubble they didn't want to...well, hyperinflate I guess.

Eliminate cash. Bwhahahahahahaha. Why? "Because interest rates on savings might hit 2% here"?

Can't even afford that?

I hope they've got a few thousand tons of gold to turn over from their personal accounts when they spew this nonsense.

seek's picture

Just one of many anti-cash articles that have run in the past few months. When you know the banks are going to go to negative interest rates, it makes perfect sense -- you have to ban cash because negative rates incentivize withdrawls, making your bank problems worse, not better.

Capital controls + cash controls -- a near certainty within the next two years in the US and every other developed economy.

Nehweh Gahnin's picture

Reading that made me want to head directly down to my CU and withdraw all "my cash" right away.  But -- oh yeah -- it ain't in there...

JRobby's picture

So it's your day to shine! Enjoy it.

LawsofPhysics's picture

What "humanity" does is largely irrelevant as the laws of Nature and physics are what they are.  If the physical resources are not available, the "physical economy" is toast, period.


Hedge accordingly (Psst, humanity isn't just another ponzi, it's the single largest ponzi the world has ever known)

disabledvet's picture

They have a SLIGHT problem with their chemistry as well.

disabledvet's picture

They should call it "half death" not "half life."

By all means "give me the mathematical formulation of Strontium 90."

El Vaquero's picture

I agree.  But I'm convinced that my state could do a fairly decent job of feeding and clothing itself even given the current resource constraints.  But we're not going to until we reach the point that the federal government is irrelevant, and at which point it will be a panic and and a lot of pain and suffering has occurred.  We're along for the ride with the monetary ponzi and resource consumption ponzi until they break down and we've not put an alternative system for meeting people's most basic needs in place.  We're not allowed to put an alternative in place.  It would cut into federal government power and banker profits.  Not to mention industrial agriculture profits.  Water will be the big issue here, but it is the fifth largest state by area with one of the smallest populations.


To those who live in places like California (especially the southern part,) or NY or any other major population center that doesn't have any agriculture very close to you, get the fuck out.

NotApplicable's picture

Just as soon as they pay-off their debts to Uncle Sugar, they are free to go. AFAIK, they haven't even started repaying the interest yet, let alone the principal.

disabledvet's picture

"Seize the assets." Rule of law of no consequence? No problem. "We'll take Yosemite then."

disabledvet's picture

"The Japanese Zero" meets "Whispering Death."

DoChenRollingBearing's picture

We should have taken our medicine years ago.  

Stop spending!

Next stop for us on the current trail: Japan. 

seek's picture

I think the reality is the distance between the Japan stop and all the other developed economies' stops is pretty short, probably measured in weeks or months.

At this point I think it's actually part of the plan, so they can roll out some sort of new-world-order-ish Bretton Woods 2.0 backed by... god knows what. Russia and China won't be playing along, so the 2.0 version isn't going to last very long when Europe can't pay for energy with it.

alien-IQ's picture

29 Trillion dollars later...and still a liquidity problem?

oh my...

pods's picture

It would be scary thinking about a squeeze with all the QE going on.

To have this problem with QE AND 29 trillion in funny money injected?

Houston, we have a problem.


disabledvet's picture


seek's picture

All of that just underscores how bad the real underlying problem (ie that the banking system collapsed in 2008) really is.

It's unfixable and I'm positive there's some folks deep within TPTB that know it, if not all of them.

TruthHunter's picture

"29 Trillion dollars later...and still a liquidity problem?"

No liquidity problem for those who actually have it.

Trickle down  only applies to small change.

Dre4dwolf's picture

printing money is not adding liquidity, you can print all you want if no one lines up to buy what you are selling you have no liquidity

the only way to increase liquidity is to increase yield and risk of default, the numbers haveto reflect risk, if they dont there is no incentive to buy.... its really simple

the central banks have essentially pumped the market to high hell, and there are still no real buyers, the market is too fake itneeds to crash to the real value to spark interest 

disabledvet's picture


The question is "what are buying with all that liquidity."


They're buying off their phucking hebes so that they can bankrupt their States!

This is WAR!!!!!!

Dr. Engali's picture

The fucking world is falling apart and the "news" alerts being pushed to my phone by CNBS are telling me about Zero signing an executive order barring federal contractors from discriminating against sexual preference. We are sooooo screwed.

Grande Tetons's picture

As long as the lesbian plumbers at the VA have work I am ok with the status quo.

disabledvet's picture

I've been a little hard up lately myself.

Spastica Rex's picture

Sexual orientation and reproductive choice, is there anything else on Earth that even matters?

Oh, except for minimum wage rates and guns?

WillyGroper's picture

"Sexual orientation and reproductive choice"

After seeing the cover of time, the repeated stomach churning transgender meme even among as young as 6 yr olds, I see a damn sinister agenda that makes Mengele look compassionate. 

GMO's, aluminum nano crossing BBB from chemtrails, exponential rise in autism lock step with the adoption of cell phones, slow death by injection, psychotropics = Transhumanism.

Found this little gem yesterday...


 In the USA, President Clinton issued a formal memorandum in 1995, stating that Transmitter Masts should not be sited on schools or near residential areas.


tempo's picture

The PC insanity will continue until the black swan financial crisis kills entitlements. Obama/Dems live on financial engineering.

thamnosma's picture

I hate wishing for collapse but I fear the only way to end the current PC madness (which is just a new name for marxist bullshit) is exactly that.

Winston Churchill's picture

All the black swans drowned in liquidity.

There won't be a crash,all markets will just close for good one Friday evening.

thamnosma's picture

Evidently for the incompetent marxist progressives, the most important aspect of life is LGBT rights.  What exactly is this LGBT mafia that has seemingly taken over the public discussion?  Transsexuals are now a critical social issue as our country decays before our eyes and the rule of law disappears?

NotApplicable's picture

Gotta have something new to fight over for the upcoming mid-term elections.

Trust me, I know, as I spent Saturday with my brother-in-law's family chock full o' evil voters who are determined to save us all.

Even if it kills us trying.


NotApplicable's picture

I love those alerts. It's my last remaining contact with CNBS, and they're just too funny to cancel.

Especially when they pop-up over the latest ZH article with the exact opposite narrative for the same story.

youngman's picture

Volume on Italian futures, which give buyers the right to purchase the nation’s debt at a future date and price, has soared more than 800 percent since trading of the contracts began in 2009, data compiled by Bloomberg show. By contrast, average daily trading in Italy’s $2.43 trillion market for government bonds, Europe’s largest, has tumbled 57 percent in the past decade, according to the Ministry of Finance.

Now they dont even want to go to the casino...they want to play outside of it...that will not end well....but it will end...and this crash will be mighty

ThroxxOfVron's picture

"Volume on Italian futures, which give buyers the right to purchase the nation’s debt at a future date and price, has soared more than 800 percent"

Does ANYONE actually expect that 800% more Bonds will be issued, even in an emergency just to keep the banks from imploding under the in a cascade of non-deliveries and/or collateral calls?

IF 800% more Bonds are issued: do the Options/Derivatives Holders actually have Trillions of Dollars on hand to exocise and buy those Bonds? 

Even IF the Derivatives Holders PRINT/Rehypothecate the funds to purchase Bonds in Such quantity:

1. ALL things being equal: would the interest payments have to be somewhere in the realm of 1/8th of the present rates since it would be impossible to generate an 8-fold increase in Government Tax receipts to fund the interest payments?

2. At the point when the Derivatives are exorcised and the Bonds start to be bought in quantity: wouldn't the collapse in interest rates envisioned in point #1 trigger mass defaults in the associated debt markets and rehypothecation chian unwinds where flow ran short or the chains failed delivery?

3. Wouldn't point #2 default cascade cause an immediate freeze in interbank lending and a cascade in the associated default swaps complex?


I guess the currencies could ALL be devalued by 90% or more all at once; but, what exactly would that solve except add zeros to the busted ledgers?

TheReplacement's picture

So this tells us this is seemingly a confirmation that the move for the exits has already begun.  It is irrational in all the ways you state.  There is the bottleneck and it will choke the system to death - the exits.  We have all known this was coming, many much longer than I.