In a world of shrinking 'quality' collateral to back the ever-increasing leverage and reach-for-yield practicalities of a centrally-repressed market, it seems the actions of the BoJ (as we warned over a month ago [6]) may have just removed the last best hope for keeping Japanese rates stable. As the chart below shows, JGB volatility is simply off-the-scale relative to the other major bond markets. Sustainable? How much return (yield) would you demand for such risk (volatility) before just jettisoning the position?
60-day realized rate volatility...
[7]
As we noted previously [6]:
This is from the October 26, 2012 minutes of the Meeting of JGB market special participants [8], just as the insanity known as Abenomics was being first revealed to the world.
Another thing to be noted here is the fact that as a risk management method, many domestic financial institutions adopt the VaR approach, which is designed to calculate the amount at risk on the basis of volatility. Under the present circumstances, we can determine the amount at risk to be small because of not great volatility. But if the volatility moves up or down in the order of 0.5% to 1.5%, it will increase the amount at risk, forcing domestic financial institutions to reduce their JGB holdings.
0.5% or 1.5%? Try ten times that.
If any financial institution still adhering to a VaR approach hasn't puked its bond holdings, it will shortly.
and appears to be doing so under the watchful (if impotent) eye of Kuroda...
[9]
which looks set to open limit-down if TSY's move is anything to go by?
[10]
Charts: Bloomberg