"They Killed The Market" - Not A Single Japanese Bond Traded On Tuesday

Bank of Japan Governor Kuroda appeared to somewhat proudly proclaim last night during his address to government that the BoJ has bought 75% of JGBs issued in fiscal-year 2017 so far! (and yet we are reassured that this is not debt monetization... not all).

"Yields in Japan are stable" Kuroda added... One glimpse at the chart below and its clear how 'stable' the Japanese bond market has become - reminding us somewhat of Monty Python's Dead Parrot sketch. As one veteran bond trader exclaimed, "they killed the biggest bond market in the world."


This is "the result of YCC [Yield Curve Control] policy" he bragged, before admitting that it "would be hard to continue YCC if trust in debt was lost," but Kuroda reminded his audience that "because BoJ has seigniorage, trust in yen won't be lost."

But is that trust starting to fade?

As Bloomberg notes, The Bank of Japan has vacuumed up so much of the government bond market -- in excess of 40% -- that it’s left fewer securities for others to buy and sell. Some other buyers, such as pension funds and life insurers, also tend to follow buy-and-hold strategies.

That’s the backdrop to Tuesday’s session, when not a single benchmark 10-year note was traded, according to Japan Trading Co. Naoya Oshikubo, a rates strategist at Barclays Securities Japan summed it up, with perhaps an understatement: "the JGB market was generally thin."

Despite the total and utter lack of liquidity in the once most liquid segment of the JGB curve, Kuroda confidently went to explain the central bank could engineer a smooth exit from its ultra-loose monetary policy, but said it was too early to debate specifics with inflation still distant from its target.

"By combining various tools, it's possible to shrink the BOJ's balance sheet at an appropriate pace while keeping markets stable," Kuroda told parliament, when asked by a lawmaker about a BOJ exit strategy.

Just one quick question Kuroda-san - how the fuck are you going to be able to step back when you bought 75% of JGB issuance this year so far?

As more market participants throw in the towel on a rigged, centrally planned market, the result will - no could - be a further loss of market function, and a guaranteed crash once the BOJ and other central banks pull out (which is why they can't).

As the Nikkei politely concluded, "if the bond and money markets lose their ability to price credit based on future interest rate expectations and supply and demand, the risk of sudden rate volatility from external shocks like a global financial crisis will rise."


pashley1411 I woke up Wed, 03/14/2018 - 13:02 Permalink

No crash, just silence.    If there are no buyers, the funds invested have the same value as the funds invested in road-side black velvet art collection; on-the-books to prop up the business, can't use it to buy a lottery ticket.

Might have some residual value if the government takes the bonds at full value for back taxes and in liquidation.    Government bureaucrats, with no skin in the game, retain their traditional role as the idiot at the poker table. But no private party will.


In reply to by I woke up

Yen Cross Wed, 03/14/2018 - 12:32 Permalink

  Krudola may not have been buying bonds last night, but based on the Nikkei movement last night the BoJ was full retard long Japanese equities and ETF's.

Cutter Wed, 03/14/2018 - 12:34 Permalink

You really have to wonder about Kuroda's sanity.  You kill your own bond market, and call it "great."  And then delude yourself that a market still exists and you can exit anytime.

And what will it take to get joe investor to start buying when you really do exit?  Much higher rates.

And then goodbye Japan.

EddieLomax Cutter Wed, 03/14/2018 - 12:41 Permalink

What I don't get is why the Yen isn't used as toilet paper?  All this money printing must have a result, yet, like in the west the money was printed and the market meekly accepted it and moves on.

One day I'm expecting everyone to wake up and all hell to break use, until then its all good.

In reply to by Cutter