Japanese Bond Curve Inverts For First Time Ever As 3Y Cash Is Now King

Tyler Durden's picture


For the first time ever, 3 year Japanese government bond (JGB) yields are trading below 1 year JGB yields as the world's inexorable desire to repatriate, delever, and seek safety while reaching for as much term yield as is still 'safe' come home to roost. With Swiss rates already grossly negative and German rates rapidly converging, the world's (d)evolution (since evolution conjures a rebirth into something better) is shifting investors out the yield curve as ZIRP is here to stay forever, wherever you look in so-called developed economies (who can print their own money). In the last 4-5 weeks, 3Y Japanese bond yields have dropped 6bps to around 10bps (pretty much the same as every other maturity inside of 3Y) as the entire yield curve gradually flattens pushing out investor's perception of 'cash' to longer- and longer-maturities. The inversion (i.e. 3 year rates below 1 year) is also interesting given its maturity coincides with the maturity of Europe's LTROs as perhaps some round-about funding mechanism to avoid EUR-USD basis swap detection is forcing money into the Japanese bond market. Of course the lower and lower rates are forced by this unintended consequence of Central Bank signaling, the further out investors will creep, accepting more and more duration, which given its generally monetized by the Central Bank ensures rates cannot rise since the jump in the cost of funds would destroy Japan's QE-driven economy. Be careful what you wish for US equity investors, as the Keynesian Endpoint is upon us (and perhaps, just perhaps that is why Central Banks of the world are checking to the Fed, the ECB is playing hardball, and the Fed remains on hold unless apocalypse occurs - which by the way is not an 8% retracement of a 30% straight line rally).

3Y JGBs trade below 1Y JGBs - leaving the short-end inverted...


and the whole curve has flattened significantly in the last few weeks...

but this is not unusual for the front-end of the German Bund curve in recent years as rotation from the USD (in 2008/9) and from periphery to core (Q3 2011 and now) drove the curve inverted as investors crept out a long a short-end that offered some yield and term safety...


and interestingly this is occurring as EUR-USD basis swaps (short-term USD funding at a premium for European entities) jerks to crisis levels again...


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Wed, 05/30/2012 - 00:34 | 2474206 Aziz
Aziz's picture

Totally insane. 

I've been talking about the bond bubble the last couple of years, but gotta give credit where credit is due: Dr. Paul was talking about bonds as the next bubble the second the housing bubble burst.

Wed, 05/30/2012 - 00:38 | 2474216 Colombian Gringo
Colombian Gringo's picture

This is nuts. The return on 3 year bonds is less than on 1 year, ZIRP is a capital destroyer. Better we kill the zombie banks than allow them to ruin everyone else.

Wed, 05/30/2012 - 00:43 | 2474229 SHEEPFUKKER

Already a negative real return. Before, it was just stupid.  Now, it's fuckin idiotic and suicidal. 


Wed, 05/30/2012 - 06:27 | 2474598 Buckaroo Banzai
Buckaroo Banzai's picture

Did somebody say "devolution"??



Best part is where the synth gets a mind of its own at 3:48. It devolved!

Wed, 05/30/2012 - 00:44 | 2474232 Oh regional Indian
Oh regional Indian's picture

This is a huge sign.


Backwardation, in currency (of course), Bonds (more and more), Stox (perhaps, in some twisted way, FB is the first stock to be in permanent backwardation at inception?), not to speak of metals (sans manipulation especially)....

Backward is the new forward. 



Wed, 05/30/2012 - 02:07 | 2474335 Manthong
Manthong's picture

Maybe we should stop referring to government fiat interest rates, yield and spreads and just start measuring relative decay rates and half-life.

Wed, 05/30/2012 - 03:06 | 2474389 Oh regional Indian
Oh regional Indian's picture

Everything nuclear? Hmmmm.....interesting...


Wed, 05/30/2012 - 05:30 | 2474455 BorisTheBlade
BorisTheBlade's picture

On a long enough timeline, yield for every bond drops to zero. When bond yields reach zero and go negative, maturity of bonds happens earlier than their issuance, time reverses. At this point monetary system reaches event horizon. One needs Kerr metric to explain geometry of empty spacetime that surrounds rotating blackhole of economic collapse that follows.

Wed, 05/30/2012 - 05:56 | 2474557 Oh regional Indian
Oh regional Indian's picture

*clap* had to google Kerr metric, thanks for that.

Excellent visualization! Whut a world...


Wed, 05/30/2012 - 08:53 | 2474938 BorisTheBlade
BorisTheBlade's picture

Ori, thanks. I find general relativity theory terminology particularly useful when it comes to drawing crude visualizations of events beyond what we used to know as the world economy.

Besides, it provides for so many poetic and accurate ways to express one fundamental, yet easily observable phenomenon: We Are All, Big Time, Fucked.

Wed, 05/30/2012 - 06:27 | 2474597 Comay Mierda
Comay Mierda's picture

The keynesian event horizon approaches, and this black hole will suck in a tremendous amount of wealth never to be seen again.

Ah who cares, what time is dancing with the stars on?

Wed, 05/30/2012 - 08:40 | 2474881 KandiRaverHipster
KandiRaverHipster's picture

the Singularity is approaching!

Wed, 05/30/2012 - 06:07 | 2474583 eclectic syncretist
eclectic syncretist's picture

1. With ZIRP what good is a bank to the average person?  Just the convenience of electronic and check transactions.  What incentive is there to keep your money in a bank?


2. If a bank were to suddenly offer just a couple percent return for a checking account think how much capital they could raise.  They could have all the money they wanted.


3. Cyber money looking for a safe haven in a financila crisis will ultimately end up in hard assets, but the convulsions leading up to that will probably break many leveraged gamblers.  When big vaults start getting constructed worldwide gold will be golden once more. Keep an eye on the safe/vault business.

Wed, 05/30/2012 - 09:09 | 2475032 Appleseed
Appleseed's picture

When most governments default or hyperinflate, their cental bank will still be the main buyer of their bonds making interest rates irrevelant, even today

Wed, 05/30/2012 - 00:34 | 2474207 CvlDobd
CvlDobd's picture

I'm listening to Procol Harum's "A Whiter Shade of Pale" The "Feeling kind of seasick" line seems appropriate.

I agree with the guy who was bitching about the arrows on the charts earlier. They are somewhat redundant. I'm not complaining though. I love these borderline technical analysis posts the most, so if ZH must have arrows then so be it.

Wed, 05/30/2012 - 00:37 | 2474213 Aziz
Aziz's picture

Tyler has added a Tyler arrow to a couple of my charts. I think it's cute and funny and almost Onionesque. I look forward to more Tyler arrows in future.

Wed, 05/30/2012 - 00:46 | 2474238 ultimate warrior
ultimate warrior's picture

I also like the arrows. It's in your face "look at this shit" that draws my short attention span in for a look.

Wed, 05/30/2012 - 00:48 | 2474242 CvlDobd
CvlDobd's picture

Fair enough.

I thought the guys sarcasm earlier asking if the green up arrows meant prices were rising was pretty funny.

Like I said, as long as we have the Hedge, I won't get too worked up over some redundant arrows.

Onionesque eh? Good call.

Wed, 05/30/2012 - 00:45 | 2474233 ironymonger
ironymonger's picture

Your charts?

Nice to meet you, Aziz Bloomberg.

Wed, 05/30/2012 - 00:51 | 2474245 Aziz
Aziz's picture

I make my own charts sometimes...

I do it slowly and cumbersomely in photoshop which is probably a dumbass way of doing it but whatever.

This post is one of the ones Tyler added a Tyler arrow to when ZH republished it.


Wed, 05/30/2012 - 00:46 | 2474236 I am a Man I am...
I am a Man I am Forty's picture

ohhhhhh snap!!!!!  inverted yield curve mean shit gettin' real in nippon

Wed, 05/30/2012 - 00:51 | 2474246 CvlDobd
CvlDobd's picture

It must be the general malaise of the Japanese economy Charles Hugh Smith was mentioning earlier.

Luckily, the gogo gangbusters fully decoupled US economy will never be allowed to have an inverted yield curve again due to its economic superiority in every measured metric.

It won't be gettin' real in DC or NY, I'm sure of it.

Wed, 05/30/2012 - 00:57 | 2474250 Trimmed Hedge
Trimmed Hedge's picture

Don't y'all worry yerselves... Uncle Feddy will come thru. I know he will.. he always does!!

Wed, 05/30/2012 - 01:39 | 2474285 CrazyCooter
CrazyCooter's picture

How many here on ZH think Beanie can fire up the presses before the Repubican convention in Tampa in August (the 27th through the 30th)? As much as I would love an RP candidate for president, it probably won't happen ... as things stand right now.

However, if the Fed pulls the trigger on X trillions in bail out for Europe, present Romney supporters may finally see the light. The Fed no longer operates in secrecy; they operate in the open. This is not the central bank of Paul Volker fame. The internet, blogs, and alternative media will be all over this shit like ducks on june bugs.

Conclusion: No bail out, no QE until the presidential race is locked down. Far too much is at stake to push the Romney nomination over a cliff and get ... *gasp* ... RP on the presidential ballot.

This fucker is going down in flames ... it might be check mate ... will have to wait and see!



Wed, 05/30/2012 - 02:53 | 2474379 oldman
oldman's picture

Hey Cooter,

Wouldn't it be funny if there was no election?

All of this EU hysteria is to distract the attention away from the two flavors of obama. imo.

The planet is not going to fall apart over how humans transact business---it will work out---the Europeans want it to work out, but in the meantime---no one questions the presidential candidates about anything really.

It feels like the election is three or four years off--or maybe, no one cares and this will be the lowest presidential voter turnout of all time

I don't think anything is going down in flames---we have just made a big deal out of the machine's death

the fucker is dead only ZH is giving it enough energy to keep going

long live zh                      om

Wed, 05/30/2012 - 01:06 | 2474263 jimmyjames
jimmyjames's picture

I wonder if the 1yr return being more than the 3yr is any crazier than when the US 30yr was retuning less then the 3 month?


It looks to me like the JBM doesn't buy the BS that an inflationary driven economic recovery is about to get underway any time soon-


Wed, 05/30/2012 - 01:08 | 2474264 sitenine
sitenine's picture

Hmm, let's see... I can buy some Japanese dept, or maybe some European debt, no, maybe U.S. debt, or I could buy gold...  So... difficult... don't... know... what... to... do...

Yeah, you'd have to be retarded to not know were the value is, now wouldn't you?  I don't know how much more plainly and simply you could possibly lay it out Tyler.  That's it - devolution - the fiat party is over.  The mother of all ponzi/bubble/scams ever devised by man has peaked.  All your collateral belong to us, bitchez!

Wed, 05/30/2012 - 01:09 | 2474265 Dad Was Right
Dad Was Right's picture

When asked how one would know when to bet against JGB's Kyle Bass said simply to watch the Japanese 5 and 10 year yields. Is this move in 1's and 3's the precursor?

Wed, 05/30/2012 - 01:09 | 2474267 q99x2
q99x2's picture

The posts seem high power. Something serious is up. Someone is getting ready to make money.

Wed, 05/30/2012 - 01:20 | 2474272 Dasa Slooofoot
Dasa Slooofoot's picture

This should be a precursor to negative GDP in Japan, right?

Wed, 05/30/2012 - 01:21 | 2474273 HD
HD's picture

"...the Fed remains on hold unless apocalypse occurs - which by the way is not an 8% retracement of a 30% straight line rally"

It's nice to hear someone else say this beyond the tired, angry voices in my head. Now I can skip tomorrow's shock therapy treatment...

Wed, 05/30/2012 - 01:26 | 2474278 lolmao500
lolmao500's picture

Bullish for the insane Japanese deficits...

Wed, 05/30/2012 - 01:58 | 2474316 MikeMcGspot
MikeMcGspot's picture

"Be careful what you wish for US equity investors, as the Keynesian Endpoint is upon us"


Please share what the Keysesian Endpoint is.


Per my understanding of the system, there is no endpoint.


Wed, 05/30/2012 - 05:58 | 2474578 Poetic injustice
Poetic injustice's picture

Keynesian endpoint is revolution and chopping of heads.

Wed, 05/30/2012 - 02:01 | 2474328 QQQBall
QQQBall's picture

I would think with the curve inverting it would be bad for someone short the JGBs?

Wed, 05/30/2012 - 02:11 | 2474344 lolmao500
lolmao500's picture

Curve inverting : bad for pensions... good for deficits.

Wed, 05/30/2012 - 02:24 | 2474361 JuicedGamma
JuicedGamma's picture

Backwardization of bond markets is to the economy as the Hindenburg Omen is to the stock market, sometimes you get a recession, sometimes a bad one.

If forced to prognosticate, something really nasty is brewing.

Wed, 05/30/2012 - 02:27 | 2474365 rayban
rayban's picture

2012 will be remembered as a once in a lifetime opportunity to short developed markets debt at bubble levels. Japan is basically broke and yet you can short ad infinitum JGBs with just 5-6% max downside and less than 1% negative carry. Take the Bund: a 0.5% yield equates to a 153-154 handle, and I doubt zero to negative repo rates will last forever. The timing might me tricky, but it sure feels like Nasdaq 1999.

Wed, 05/30/2012 - 03:12 | 2474397 dognamedabu
dognamedabu's picture

Did everyone run to the other side of the boat for real now because there are really big sharks attacking on the other side or is it like all the other times when someone screamed shark! and then we found there was nothing so we through them into the water to test it out? Because if not, we are running out of people. 



Wed, 05/30/2012 - 03:37 | 2474409 AUD
AUD's picture

There is still plenty of 'profit' in bonds at the long end. I don't think the endpoint is near.

Central bank credit is already junk trading 'money good', so it doesn't matter what they monetise.

Wed, 05/30/2012 - 04:54 | 2474456 world_debt_slave
world_debt_slave's picture

ah, thanks for the memories

Feels like the first time


Wed, 05/30/2012 - 05:39 | 2474523 Go Tribe
Go Tribe's picture

Hello, I'm your one-world government and I'm here to help you.

Wed, 05/30/2012 - 06:04 | 2474581 Ghordius
Ghordius's picture

Oh, finally! Please, decrease to zero the current Wars on "blablabla-whatever" and declare War on Stupidity, Megabank collusions and Corruption. Please start with Derivative Madness and Betting the House for Bank Bonuses.

Wed, 05/30/2012 - 07:09 | 2474641 Stimulati
Stimulati's picture

This isn't Keynesianism, it is Friedmanism

Wed, 05/30/2012 - 07:34 | 2474691 boa74520
boa74520's picture

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Wed, 05/30/2012 - 21:10 | 2477891 baltbear
baltbear's picture

"evolution" suggests nothing at all, either positive or negative.

 Ask the dinosaurs.

There is no Keynsian endpoint, only he beginning of the end game for the moral corruption of paulson/greenspan flavoured ayn rand wet dreams.


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