Well that didn’t take long. Just yesterday we noted that Japanese policy makers were starting to get wise [6] to the fact that rampant monetization of government bonds can (and will) foster extreme volatility by robbing the market of liquidity [7] and inhibiting price discovery. We went on to warn that with the BOJ greedily sucking up all gross JGB issuance (and in the process driving historical volatility to near two-year highs last month), all it will take are a couple of more weak auctions (like the 10- and 5-year debt sales from February) for things to go awry and that’s just what happened overnight.
Yields on JGB 10s rose 4 bps and the 30-year yield tacked on 6 bps after demand was tepid at the monthly 10-year sale. While down from last month’s 12-year high, the tail, at 0.33, was still some three standard deviations outside of the historical norm (not good). Allow us to reiterate (although this should, by now, be self-evident to anyone with a pulse) that Japan simply cannot afford for yields to spike as the entire ponzi scheme rests solely on there being a constant bid (from somewhere) for JGBs. The next test is Thursday’s 30-year auction which, according to Bloomberg, traders are already worried about.
We’re starting to notice a pattern here:
[8]
Meanwhile, another government adviser (this makes the second in two days) expressed skepticism about Japan’s ability to manipulate markets in perpetuity. Further easing “shouldn’t be undertaken,” Etsuro Honda, an adviser to PM Abe told WSJ, adding that the dollar likely can’t go much higher against the yen as we’ve probably reached the “upper limit in the exchange rate’s comfort zone.”
We’re reminded of what we said last month [9]: “The idea that a nation can devalue itself into prosperity on the backs of the rest of the world was total idiocy after all.”
