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...


Charts: Bloomberg

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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.

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.


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


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!

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. 



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.

Oh regional Indian's picture

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


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.

Oh regional Indian's picture

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

Excellent visualization! Whut a world...


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.

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?

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.

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

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.

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.

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.

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.

ironymonger's picture

Your charts?

Nice to meet you, Aziz Bloomberg.

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.


I am a Man I am Forty's picture

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

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.

Trimmed Hedge's picture

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

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!



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

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-


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!

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?

q99x2's picture

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

Dasa Slooofoot's picture

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

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...

lolmao500's picture

Bullish for the insane Japanese deficits...

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.


Poetic injustice's picture

Keynesian endpoint is revolution and chopping of heads.

QQQBall's picture

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

lolmao500's picture

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

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.

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.

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. 



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.

world_debt_slave's picture

ah, thanks for the memories

Feels like the first time


Go Tribe's picture

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

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.

Stimulati's picture

This isn't Keynesianism, it is Friedmanism

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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.