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Japanese Govt Bonds Are Crashing After Weakest Auction Since Lehman

Tyler Durden's picture




 

Today's 10Y JGB auction saw the lowest bid-to-cover ratio since Feb 2009 at just 2.24x with a notable tail of 1.1bps (the widest since March) as it appears once again, the total dissolution of liquidity from the largest bond market in the world has left the BoJ and Ministry of Finance losing control. The reaction is dramatic with 5Y through 30Y yields up 5-8bps (10Y +8bps at 47.6bps - the biggest absolute jump in yields in 2 years) leaving 30Y yields at 2-month highs above 1.49% and 10Y yields at 6-month highs.

Weakest auction since Feb 2009...

 

Repricing the entire curve dramatically higher...

 

Sending 10Y yields crashing the most in 2 years to 6-month highs...

 

This is a major problem, since as we discussed previously, the reignition of VaR shocks (in the 'safest' of assets) can quickly lead to forced selling to reduce risk allocations...

The second self-feeding dynamic is something we’ve discussed at length before, most notably in 2013 when volatility-induced selling — reminiscent of the 2003 JGB experience — hit the Japanese bond market again, prompting us to ask the following rhetorical question:

 

What happens to JGB holdings as the benchmark Japanese government bond continues trading with the volatility of a 1999 pennystock, and as more and more VaR stops are hit, forcing even more holders to dump the paper out of purely technical considerations?

 

The answer was this: A 100bp interest rate shock in the JGB yield curve, would cause a loss of ¥10tr for Japan's banks.

 

What we described is known as a VaR shock and simply refers to what happens when a spike in volatility forces hedge funds, dealers, banks, and anyone who marks to market to quickly unwind positions as their value-at-risk exceeds pre-specified limits.

 

Predictably, VaR shocks offer yet another example of QE’s unintended consequences. As central bank asset purchases depress volatility, VaR sensitive investors can take larger positions — that is, when it’s volatility times position size you’re concerned about, falling volatility means you can increase the size of your position. Of course the same central bank asset purchases that suppress volatility sow the seeds for sudden spikes by sucking liquidity from the market.

In a nutshell, this means that once someone sells, things can get very ugly, very quickly.

Charts: Bloomberg

 

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Tue, 05/12/2015 - 02:14 | 6083856 Ham-bone
Ham-bone's picture

Bond rates rising across all advanced Ponzi's...interesting considering China, Russia, and OPEC net collectively stopped buying US Treasury debt as of July '11...and since then it's all about The Fed's Backdoor QE - QE via Central Bank Currency Swaps and foreign Treasury purchasing.

It was Japan plus Belgium, Luxembourg, Ireland, Cayman Islands, and Switzerland via currency swap fueled purchases that saved the US from interest rate armageddon...Article details those nations with Fed swap lines vs those without...and guess which group of foreigners is buying all the US Treasury debt...

http://econimica.blogspot.com/2015/05/the-feds-backdoor-qe-central-bank.html

Are we approaching a limit to the Ponzi???  I can't imagine any limit to how far CB's would go...so, not sure what we are looking at here?  Maybe dissension in the ranks?

 

Tue, 05/12/2015 - 02:24 | 6083882 ml8ml8
ml8ml8's picture

Historically, JGBs have yielded around 1% and, combined with 1% deflation, provided a real return of 2%.  

Do people realize that, if the BoJ attains it's goal of 2% inflation, then to get a real return of 2%, JGB's would have to yield 4%?  On 10 years, that's way more than the 100bps pop referenced above.  If a 100bps jump would knock a US$100b hole in bank balance sheets, then 300bps would create banking chaos if it occurred in a period of, say, less than a decade.  

I really don't think markets are prepared for the BoJ to succeed in achieving it's inflation target any time soon.  I sure hope the 3rd arrow of structural reforms kicks in soon.

Tue, 05/12/2015 - 02:33 | 6083907 tc06rtw
tc06rtw's picture

 …  but why would  ANYONE
         want to  SELL ??!!

Tue, 05/12/2015 - 06:37 | 6084125 Captain Debtcrash
Captain Debtcrash's picture

Largest bond market? I think the US still has them by about 6 trillion.

Tue, 05/12/2015 - 21:49 | 6083906 tc06rtw
tc06rtw's picture

… interest rates  ALWAYS GO DOWN  !!

Tue, 05/12/2015 - 04:24 | 6084008 The_Small_Lebowski
The_Small_Lebowski's picture

This is a banking shop ----- for banking people!

We'll have no selling here...........

Tue, 05/12/2015 - 05:31 | 6084055 Dead Canary
Dead Canary's picture

NOT LOCAL!!!

Do NOT follow this link or you will be banned from the site!