The world’s second-largest government bond market after the U.S., with some $9 trillion in outstanding debt, is dead, slayed by the constant repression of a central-bank clinging to any smoke and mirrors it can monetize to keep the delusion of normalcy alive.
As The Wall Street Journal reports, the daily volume of government-bond trading is often measured these days not in trillions or billions, but in millions of dollars - and, as we previously detailed, sometimes just with a single digit, zero.
The central bank is swallowing up so much of the new bond issuance that traders say there is just not much to do.
And as Bloomberg reports, a gauge of expected volatility in Japanese bond futures slid to a record low today as speculation the central bank will adjust its target for 10-year yields waned.
Earlier this year the market was betting the Bank of Japan would tolerate a wider deviation in benchmark yields away from zero, but as the yen rallied this hope has been dashed, said Akio Kato, general manager of trading at Mitsubishi UFJ Kokusai Asset Management Co. in Tokyo.
Longer-term, the divergence is even more notable - bond risk and stock risk have shifted regimes...
Bond volatility fell to 1.27 percent, the lowest in data compiled by Bloomberg starting in 2008.
“It’s becoming like a deserted village. All that’s left is for us to fade away and die,” said Jun Fukashiro, who oversees bond investments for Sumitomo Mitsui Asset Management Co. The 53-year-old asset manager, who has been involved in government bond investing or trading since 1990, says that when he goes out with people in the business, he just sees the old faces, “the ones who are headed for retirement pretty soon.”
The Bank of Japan already owns 41% of the Japanese government bond market and is buying hundreds of billions of dollars more each year to pump cash into the financial system and ensure that plenty of low-interest funds are available for borrowers.
WSJ reports that Tadashi Matsukawa, who heads the bond-trading unit at the Tokyo office of New York-based asset manager PineBridge Investments, said he used to trade Japanese government bonds every day before the Bank of Japan pinned the yield near zero. Now it is every other day, he said.
Mr. Matsukawa said he misses the excitement of a more active market. “There is limited space for us to move around, less opportunity for us to make money.”
“There is only one trade in town now that makes money,” says Naka Matsuzawa, rates specialist with Nomura Securities - that's when brokerages that have purchased bonds at Ministry of Finance auctions resell the bonds to the Bank of Japan, which isn’t allowed to buy them directly from the government.
At some point, he said, pressure for bond yields to rise may build up, and there won’t be many people left who know how to handle such volatility.
“A big change will probably take place once everyone’s gone,” he said. “That’s always the case in markets.”
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."