Two weeks ago, on October 5 the financial punditry was dumbounded when - for the first time ever - the US Treasury sold $21 billion in 3-Month Treasury Bills at a yield of nothing, or 0.000%. And while the US had sold 1 month bills at zero yields before, this was the first time that investors were willing to fund Uncle Sam and give Jack Lew the privilege of holding their money not for 1 but 3 months without expecting anything in return.
The subsequent weekly 3M auction this Tuesday also priced at a yield of 0.000%, leading many to ask if this is just a preview of negative interest rates coming to the US, something the Fed has been ever louder hinting at ever since the infamous negative dots on the dot plot (for our own take on whether NIRP is coming, read "Fed Opens Negative Interest Rate Pandora's Box: What Happens Next").
Yet once again, when it comes to the dark hole of the zero lower bound (and beyond), Japan remains the harbinger of what is coming. "Dark hole", because there is simply no escaping it, as Japan so vividly demonstrated back in August 2000 when, just like the US, after years of ZIRP, it tried to "telegraph" normalcy and hiked rates to a modest 25 bps, only to go right back down seven months later.
What is surprising about Japan is that unlike most of Europe, which has opted to adopt a Negative Interest Rate Policy, or NIRP, because unlike Japan or the US, it can't push rates synthetically as negative via QE because Europe simply does not have enough sovereign paper to monetize, is that Japan whose monetary policy became a basket case years ago - for those keeping count Japan is currently on QE10...
... it still hasn't thrown in the "all-in" towel and announced negative rates.
This may have officially changed yesterday, when in an auction that flew deep under the radar, Japan sold 1 Year (not 3 Month) Bills at the most negative yield in history, or -0.0418%, nearly doubly more negative the -0.0252% yield on the September 16 auction.
To be sure, this may be more than just a simple bet that Japan is about to join Europe (and soon, the Fed) in unleashing negative rates. According to Tadashi Matsukawa, Tokyo-based head of fixed-income investment at PineBridge, "there appear to be inflows from overseas in Japan’s short- term securities because rates are negative in Europe and an early Fed liftoff looks unlikely in the U.S."
It's not just the liftoff that is looking unlikely: another imminent catalyst that may be causing this scramble for Japanese Bills is the upcoming debt ceiling fight. As a reminder, absent a debt ceiling hike or another extension, the US will run out of "emergency" funds in the second week of November, and so it is imperative that a deal be concluded by November 3. With this looking increasingly uncertain, US bills that mature after the debt ceiling D-Day, some time around November 10, are starting to get sold off. WSJ has more:
Concerns that the U.S. could run out of money next month rippled through the bond market Friday, marking a return to the worries of previous debt-ceiling standoffs. The yield on the U.S. Treasury bill maturing on Nov. 12 rose to 0.036% Friday, the highest since Aug. 19 and up from 0.005% Thursday. Prices fall as their yields rise.
While yields remain ultralow, the trading is a reversal for a security whose yield for the past few weeks has often been below zero, reflecting outsize demand from money-market funds and other investors and a decline in bill issuance by the U.S. government.
Congressional leaders appear increasingly unlikely to reach any kind of budget deal in time to ease passage of an increase in the federal borrowing limit needed by Nov. 3. Failure to reach a budget agreement by early next month would put pressure on Republican leaders and President Barack Obama over the terms of a debt-limit increase.
To be sure, we have all seen this play out many times before, and "Friday’s trading marked a repeat of debt-ceiling showdowns in 2011 and 2013. Both times, yields on bills maturing around the debt-ceiling deadline spiked before falling once legislators agreed to increase the national borrowing limit."
In other words, just as we said one week ago, "Keep an eye on T-Bill yields for the turning point when the market decides this situation is becoming serious."
According to the market (if only just the bond market for now, stocks continue to do their HFT momentum ignition-cum-short squeeze thing), it just started to get serious.
And yet the irony is that it will have to get even more serious for the market to whip the GOP into action, and to come up with a debt ceiling solution. For now, the complacency among everyone that nothing can possibly go wrong is unprecedented which means the market itself may have to do the heavy lifting once again as it did in August 2011 when a debt ceiling deal seemed impossible until the S&P500 promptly tumbled 20% in no time.
For now, however, any market tumult is reverberating very quietly and only in the Bill market - not only that of the US, but also the abovementioned Japanese record negative 1Y Bill yield. As can be seen in comparing the yield on the November 12 T-Bill with the auction yield on the Japanese 1 Year Bill, what may be pushing Japan further into NIRP is not so much concerns about Kuroda going "Full QEtard", as much as the US defaulting on its debt.
There is a third option: the BOJ is expected to make a critical announcement on October 30, which many believe will be increasing its QE10 (aka QQE) beyond the already expanded parameters (recall it was almost precisely one year ago, on October 31 when the BOJ increased its QQE for the first time, announcing it would monetize JPY 80 trillion monthly, up from JPY60-70 trillion).
However, since even Japan has run out of willing sellers from whom it can buy Treasury paper, there is a possibility that Japan will merely go where Jordan, Draghi and Ingves have boldly gone before and announce negative interest rates.
So to summarize what may be going on is the following, here are the three possible scenarios
- Fears over a US debt default are forcing holders of short-term US debt to rush out of US Bills and go into Japanese short term paper
- A US debt default, while unlikely, will require a market event "shock" to stir the complacent GOP out of its hypnotic trance that "Ms. Chairwoman will get to work", and from stonewalling the passage of a debt ceiling extension, or even just the election of a speaker.
- Japan may itself be approaching the limits of ZIRP and be on the verge of NIRP.
And all this is happening while equities ignore absolutely everything taking place in the world and trade purely on technicals and "hope" for even more future liquidity flow out of central banks, because a global depression would be just what is needed to send the S&P to all time highs.
The biggest irony is that it is no longer clear how the S&P500 would react to a US default: once upon a time, this would be the event that not only ends the dollar's reserve status but wipes out trillions in market cap in an instant. This time, it just may send the market limit up...