Two days after Japanese yields plummeted on January 29, when the BOJ unexpectedly stunned the world by announcing negative interest rates, the Japanese government sold 10 Year Bonds at what was then a near record low yield of 0.078% in an auction which carried a 0.3% coupon. Since then things have only gotten more... deflationary, and as can be seen on the chart below, as of this moment the 10Y JGB is yielding a record-0.055%
And since Japan is set to issue JPY2.4 trillion ($21 billion) in 10 year notes in a few hours, it means that for the first time ever, the Japanese government will be paid to actually "sell" 10Y paper - bonds which will have a negative yield at issue.
This won't be the first time Japan has sold NIRP paper: as Bloomberg writes, over the past month Japanese government bonds of as long as five years in maturity sold at a negative yields, however tonight is only the first time when the entire curve through the 10 Year mark will be submerged below the X-axis.
However, where things may get tricky, is that as BBG adds demand at 10-year note auctions has declined this year as yields continued their slide, even with the central bank having the scope to buy every new bond issued as part of its stimulus program. In other words, bidders have no choice and if they want the "safety" of government backstopped collateral, they will have to pay Abe for the privilege of giving him their money for the next decade.
“There are concerns about who would actually buy 10-year bonds with negative yields,” said Shuichi Ohsaki, the chief Japan rates strategist at Bank of America Merrill Lynch. “Even if you wanted to participate in the BOJ trade, you would have to hold onto the bond until it becomes eligible for the BOJ operation. And with the increase in volatility, it’s a tough one to trade.”
Where things get even more complicated is that in China the concept of a yield curve is practically non-existent: as the chart below shows, the JGB yield curve was the flattest on record at the end of last week, under pressure from the BOJ’s bond purchases, with the premium offered by 10-year securities over two-year notes narrowing to just 11.5 basis points.
That's not all: if DB's Makoto Yamashita is right, tonight's auction may be quite "turbulent":
"We expect the10y JGB auction on the 1st to be a new issue with a 0.1% coupon, but auction yields are likely to go into negative territory. We do not expect the bank sector to buy, and demand from dealers and foreign investors is unlikely to provide sufficient support. We expect the auction to be turbulent given investors are also unlikely to short futures and the possibility of a tail. "
Then again, Japan hasn't had a functioning, free or efficient bond market in a decades. This is the same market which none other than SocGen's Albert Edwards recently fell in love with because Japan's 10Y bond is the only asset class which, as we reported last week, has not had a losing year since 2007.
While Edwards was "all in" 10Y JGBs, we - and certainly Kyle Bass - are less euphoric. As we said:
Yes, Japanese bonds have generated positive returns for the past 9 years, but all it takes is just one moment of sheer central bank stupidity, or outright insanity, to destroy everything. The BOJ had just such a moment one month ago when it launched NIRP. What if the next moment is its last?
What is the next moment is in a few hours?
Who knows: perhaps the combination of a manipulated, rigged bond "market", one which is entirely dominated by the BOJ, with an unprecedented event like the first ever negative yield on a 10Y JGB in history, is precisely the catalyst that will not only snap Japan's unbroken treasury record, but finally end the farce that is Japan's centrally-planned, well... everything, and result in the Bank of Japan finally losing control.
While we don't think tonight's auction will be the catalyst just yet, keep an eye on the auction results when the come in. Just in case.