In the world of bonds, few things have perplexed investors as much as the ridiculously low (and going lower) rates of Japanese Government Bonds (JGBs), at last check yielding 1.22%. Granted "deflation" in Japan has long been quoated as the key driver for the ongoing decline in real and nominal rates, but in practical market terms it was always the fact that there was a buyer of first and last resort, usually this being either Japanese citizens directly or their proxy, the Japanese Government Pension Investment Fund (GPIF) that kept yields in check and sliding. No one has been following the story of the perpetually collapsing JGB yield better than SocGen's Dylan Grice (for the best overview of this issue we suggest: "Upcoming Government Funding Crises: Japan Edition"). And while as Dylan has pointed out before, the direct purchase of bonds by the population has slowed if not reversed entirely (and in the aftermath of the March 11 earthquake we are confident many have entered run off mode - we will attempt to confirm as soon as official fund flow data is released), the GPIF has always been a buyer of last resort. Until now. Reuters reports that the Kyle Bass pain trade, which has for so long gone counterintuitively, may be about to pay off in spade.
Japan's public pension fund is planning to withdraw about 6.4 trillion yen ($78 billion) from its assets in this financial year to cover a shortfall in pension payouts, the Nikkei business daily reported on Sunday.
The Government Pension Investment Fund (GPIF) holds assets of about $1.4 trillion, larger than both the Canadian and Indian economies, and is a major force in the Japanese government bonds (JGB) market, where it parks two-thirds of its assets.
And if one isn't buying, it means that one is...
The GPIF is likely to raise cash by selling JGBs and other assets in its portfolio as pension contributions and tax income continue to fall short of pension payouts which are growing as Japan's population ages, the newspaper said.
For the financial year that ended in March, the GPIF withdrew about 6 trillion-7 trillion yen to cover the shortfall, the Nikkei said.
This financial year, the fund plans to secure about 4.7 trillion yen for the purpose by not reinvesting money redeemed from JGBs coming to maturity, and raise another 2 trillion yen by selling stocks and bonds, the Nikkei said.
Think of it as the US Social Security Trust Fund, which as of last year is in a net cash losing position. Ironically, the demographies of Japan and the US may not be that different. And as liquidations start to fund cash pension obligations, it merely raises another key question: who will just buy all this debt coming to market? In Japan, the answer is unclear, but the banking cartel is hoping it can collude enough for the market not to notice that the long-term bid is about to migrate to the BOJ, as another country succumbs to that terminal phase of the Ponzi unwind.
The GPIF has asked trust banks and others for advice about how to lessen the market impact of its asset sales, including the possibility that the fund might secure 2 trillion yen by bank lending to finance part of the payout shortfall, the Nikkei said.
We are confident the Japanese banking system, which is now predicated upon the assumption that the 10 Year JGB has to trade inside of 1.5% will do a quick cost benefit analysis and realize that they will do anything it takes to prevent the truth from coming out, namely that the core holder (not marginal) of Japanese debt is now in run off mode. And with the Japanese population one of the oldest in the developed world, Dylan's prediction from 2010 (and before) is about to come true. And what Reuters ignores is the far more important implication for US paper that this catalytic event forestells:
This is far from just a JGB market problem. As Japan's retirees age and run down their wealth, Japan's policymakers will be forced to sell assets, including US Treasuries currently worth $750bn, or Y70 trillion "eight months" worth of domestic financing. At nearly 10% of the outstanding US Treasury stock, this might well precipitate other government funding crises (bearing in mind that the Japanese model is the argument buttressing confidence in Western government bonds in the face of deteriorating fiscal conditions). At the very least I'd expect it to trigger an international bond market rout scary enough to spook all other asset classes.
So, about that QE ending...