While the rest of the world was preparing to celebrate Christmas, China was busy easing its economy into growth, and its stock market into low earth orbit, by lowering non-bank deposit reserve rates to zero as reported previously, while Japan was enjoying the consequences of the BOJ monetizing 100% of all gross JGB issuance, when overnight the Japanese Ministry of Finance not only sold $22 billion in 2 Year paper at a negative yield of -0.003%: the first time ever a government note (not bill) has sold at a negative yield, but the Japanese 10 Year yield dropped to 0.31%, declining below the previously all time low hit on April 2013 when the BOJ first announced its unprecedented QE program.
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While negative auction yields have moved steadily along the Japanese yield curve, with three-month and one-year bills already sold at sub-zero yields earlier this year, the relentless surge in bond prices, and tumble in yields, merely confirms what we said recently: the global shortage of high quality collateral [17](set to get 20% worse in 2015) will wreak havoc with the central-planners' intention to boost yields in "confirmation" that a reflationary recovery has taken place.
Case in point: as Reuters reminds us, in Europe, the two-year German bund yield has spent most of its time since August beneath zero, while in the Swiss government debt market even the five-year yield has gone negative.
At this point it is probably worth updating the chart showing how many billions in European Treasury debt [18]trade at negative yield. Ironically, the bond market is now so broken that Japanese yields, already at record lows, are actually higher than matching maturities in many European countries.
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So what is causing this market distortion? Why the BOJ of course. Recall that as we showed previously, following its latest QE expansion the BOJ is set to monetize all gross issuance [20]in 2015.
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But it is not just gross issuance: the BOJ is also buying up existing bonds from the private market, i.e., the infamous POMO pathway, which means that all the BOJ is doing is enabling the purchases of other securities from those it buys bonds from (at a markup since the BOJ is completely cost-insensitive).
So what really is the BOJ buying? For the answer we go to the latest Japanese flow of funds report in which we find that Japanese pension funds bought 2.21 trillion ($18.6b) yen of overseas securities in the third quarter, the most on record dating back to 1998: a more than sevenfold increase from Q2.
They did this because at the same time, they sold 2.85 trillion yen of JGBs in the three months ended Sept. 30, an all-time high and twice as much in 2Q, to whom? Why the BOJ of course. And not only did they sell it, they made a killing because as the plunging yield indicates, the BOJ keeps lifting the bid for the price it will pay for any JGB paper across the curve.
In other words, the BOJ just bought, indirectly, a record amount of foreign stocks. We hope it is now clear why Goldman, Krugman and the entire Keynesian brigade have been urging Abe to continue with his destructive policies until the bitter end.
And as long Japan's rates keep going lower courtesy of the relentess BOJ bid, global equities will keep rising: after all that is the whole premise of a fungible, globalized monetary system in which it no longer matters if the Fed, or the BOJ, or the ECB is doing the monetization.
But how does this ridiculous Keynesian "perpetual engine" of stock market growth end? We have made our opinion [22]quite clear on the topic over the past 2 years, so instead we will hand the mic over to Blackrock [23]:
being bullish on Japanese equities has become somewhat mainstream in the last two years. Foreign investors dominate trading, with a 60% share of volume on the Tokyo Stock Exchange. A loss of confidence in Abenomics could cause market gyrations. Reforms to develop a stronger equity culture would reduce Japan’s vulnerability to the mood swings of global investors, but this will take time.
The BOJ is playing with fire. What if the central bank actually succeeds and inflation starts to take off quickly? The nightmare scenario would be a spike in JGB rates leading to a fiscal crisis. Japan’s public debt load stands at almost 250% of GDP, according to the IMF, the highest in the G7.
Which also "explains" why Japan has the lowest 10-Year yield too...
