Behold Unintended Consequences: Japan Cancels 10Y Auction For First Time Ever Due To Sub-Zero Rates

Tyler Durden's picture

Dear Bank of Japan, how do you spell unintended consequences:

  • PLANNED MARCH SALE OF 10-YEAR JAPANESE GOVERNMENT BONDS THROUGH BANKS TO BE CANCELED AMID EXPECTED BELOW-ZERO YIELDS - NIKKEI
  • JAPAN'S MINISTRY OF FINANCE IS EXPECTED TO ANNOUNCE WEDNESDAY THE FIRST-EVER DECISION TO CALL OFF SALES OF 10-YEAR JGBS- NIKKEI

Here is the full Nikkei report on this absolute stunner of a development:

The planned March sale of 10-year Japanese government bonds through banks to retail investors, municipalities and others will be canceled amid expected below-zero yields following the Bank of Japan's recent move to adopt negative interest rates.

 

The Ministry of Finance is expected to announce Wednesday the first-ever decision to call off sales of 10-year JGBs.

 

The JGBs in question are sold through Japan Post Bank and regional banks in 50,000 yen ($415) units. The holder can cash out this new type of bond ahead of maturity. With the ministry already having suspended sales of two- and five-year instruments, all sales will end. But variable-rate 10-year JGBs for retail investors will still be offered.

 

Winning bids at the ministry's auction of 10-year JGBs on Tuesday translated to a record-low average yield of 0.078%. As of Monday, nearly 70% of JGBs on the market already had negative yields, according to the Japan Securities Dealers Association.

 

Corporations and municipalities have started delaying their own issuances. Daiwa Securities Group has dropped plans to set conditions later this week for the issuance of seven- and 10-year straight bonds this month. The brokerage decided to take a fresh look at JGB yields and investor demand and said it has not decided when to proceed.

 

The Nagoya Expressway Public Corp., which had planned to float bonds later this week, has postponed the setting of conditions to next week.

 

Some have gone ahead with plans. Osaka Prefecture issued Monday two-year bonds with a coupon rate of 0.001%. A prefectural official said this was effectively the minimum interest rate, since lower bids were not accepted.

As a reminder, Japan can't monetize more debt - the only thing that is keeping its yields from spontaneously exploding - unless it can concurrently issue more debt. After all the only reason the BOJ did NIRP is because it already faced a limit on how many bonds it can monetize.

So what next: a complete shutdown of Japan's debt-funding machinery, which the country with the 250% debt/GDP is entirely reliant upon?

Oops.

"Wait, what's that, policy failure less than 3 days after I announced NIRP? Unpossible."

 

So... what does the most indebted country in the world do now? Treasurys, of course, are delighted: if Japan can't buy Japanese debt, it will buy US paper and will do so in size.

And the real question: how is it even possible that Japan do this without anticipating that its 10Y yields would promptly go sub zero and thus clog up its bond issuance machinery, unless that outcome was precisely the intended one?