JGB Watch: 10 Year Yields Reenters Crash Zone

I am in a Japan debt crisis alert mode so my JGB updates.

Japan’s key stock market benchmark, the Nikkei closed marginally up (.1%) today after steep intraday swings

Part of the early upside in the Nikkei could be due to the early interventions by the BoJ on JGBs. 

Near the closing bell, the Nikkei’s more than 1% gains were almost wiped out, except for the residual gains.

As of this writing, JGB yields across the curve has gone materially higher except the 30 year.

10 year yields have already encroached on Last Thursday’s flash crash zone.

So far, the ongoing turmoil in Japan’s bond markets have not yet caused panic elsewhere. Although Europe’s markets have been modestly lower as of this writing.

The Nikkei futures has likewise been moderately down by less than 1%.

Oops, JGBs Yields Edge Higher Again

I am in a Japan debt crisis watch mode. So my focus on JGBs.

Japan’s stock market markedly rallied today, the benchmark Nikkei close 1.2% higher today. Most Asian markets have been up today, some are still trading as of this writing.

Chart from Bloomberg

But despite the stock market rally, Japan’s bond markets remain queasy as investors failed to show up at the Japanese government’s 20 year bond offering today.

From Reuters (bold mine) 

Japanese government bonds skidded on Tuesday, with the benchmark yield moving back toward last week's 13-month high, after a 20-year sale disappointed some investors and a Bank of Japan official offered no specific steps on market operations.

BOJ board member Ryuzo Miyao told a news conference on Tuesday it was vital to keep long- and short-term interest rates on a stable path.

His remarks offered little in the way of concrete reassurance to a market left reeling by the central bank's massive stimulus scheme unveiled on April 4, under which it is buying a monthly amount equivalent to 70 percent of JGB issuance.

Miyao's comments, combined with a recovery in recently languishing Japanese shares, added to the pallor cast by the downbeat auction outcome.

Yields rose across the JGB curve with 5 and 10 years rising most at an even 5 bps. Meanwhile, the yields of 30 years inched up by 2 bps and the 2 year added 1 bp.

With the 10 year at .87%, will the 1% mark be tested again in the coming days? If so how will financial markets react? Will global markets interpret this as just hunky dory or topsy turvy?

Yes, things are getting to be a lot interesting.

Super Abenomics: Japan’s Nikkei Crashes on Rioting Japanese Government Bonds

Just a few days ago, I posted the Economist magazine’s seeming worship of “Abenomics” which featured PM Shinzo Azi as a Superhero.

Sometimes magazine covers can be useful indicators of extreme sentiments or the bandwagon effect via the stages of mania or depression or of crowded trades. Occasionally they serve as key harbingers to major inflection points.

I am not sure if today’s JGB incident represents a major reversal that should usher in a risk off condition, but I am sure that this serves as my alarm bell.

Well, a riot in Japan’s Governments Bonds has sent the Yen in a spike and simultaneously a crash in her stock markets. The Nikkei dived by 7.3%!

First the upheaval in the JGBs.

From the Bloomberg:

Japanese government bonds fell, with 10-year rates touching 1 percent for the first time in a year, on speculation the Federal Reserve will curb stimulus and the Bank of Japan will tolerate an increase in yields.

Japan’s five-year note rate matched the highest in two years after Fed Chairman Ben S. Bernanke said yesterday the central bank may trim bond purchases if policy makers see indications of sustained economic growth. The BOJ injected 2 trillion yen ($19.4 billion) into the financial system to stem volatility following a circuit breaker in JGB futures trading.

The reality is that this has little to do with Ben Bernanke’s latest statement but has everything do with the much touted elixir called “Abenomics”. 

The Bloomberg chart of JGB’s 10 year yield has been climbing since the BoJ’s Kuroda announcement to double her monetary base last April. In other words, the yields has remained lofty even when Japan’s government has tried to calm her down by buying them. 

Today the BoJ bought a record number of yields in an attempt to assuage the markets, from another Bloomberg article:

The Bank of Japan injected 2 trillion yen ($19.4 billion) into the financial system today to stem volatility, as benchmark JGB yields swayed the most since the day after the central bank announced unprecedented bond buying.

The following table form Bloomberg, shows of the surge across the spectrum of the yields of Japan’s bonds, in a month’s period. This comes with the exception the 2 year yield.

I keep repeating that Abenomics is bound for failure for the simple reason that such policies have been founded on economic inconsistencies and premised on hope on the supposed magic of doing the same thing over and over again and expecting different results:

Abenomics operates in an incorrigible self-contradiction: Abenomics has been designed to produce substantial price inflation but expects interest rates at permanently zero bound. Such two variables are like polar opposites. Thus expectations for their harmonious combination are founded on whims rather from economic reality.

Next the Japan’s stock market crash has sent almost the entire Asian region in a sea of red as shown by the table above from Bloomberg, both the Nikkei and the Topix were down 7.32% and 6.87% respectively .

Here is the Bloomberg:

Japan’s Topix index tumbled almost 7 percent, the most since the aftermath of the March 2011 tsunami and nuclear disaster, as financial companies plunged amid rising bond yields. The rout triggered a halt in Nikkei 225 Stock Average futures trading in Osaka.

Consumer lenders lost 11 percent to lead declines among the Topix (TPX)’s 33 industries. Mitsubishi Estate Co., the country’s biggest developer, slid 9.3 percent. Mitsubishi Motor Corp. dropped 14 percent, falling a second day after advancing more than 50 percent in the previous three days. Tokyo Electric Power Co. plunged 13 percent.

And given the stock market’s latest near vertical ascent, the ensuing crash simply accounts as “every action has an equal and opposite reaction”, from the same article:

A measure of share swings surged to its highest in two years. The Topix’s 50-day volatility rose to 28.8, the highest since May 2011, according to data compiled by Bloomberg.

The Topix and Nikkei 225 Stock Average have risen more than 40 percent this year, outperforming all major equity indexes amid unprecedented Bank of Japan easing. The Topix trades at about 1.4 times book value, compared with about 2.5 for the Standard & Poor’s 500 Index and 1.7 for the Stoxx Europe 600 Index.

The coming sessions will be very crucial.

It isn’t the yen or Japan’s stock markets that will be the primary concern rather it is the JGB or Japan’s bond markets that will act as the driving force.

The bond markets has been in a parallel universe or in patent disconnect with the stock markets, where we just saw today the realization of a Wile E Coyote moment.

Previous soaring stock markets amidst unstable bond markets has finally led to a regression to the mean. As today has shown, stock markets are the last to know.

Yet if the BoJ will not be able to tame the bond markets in the coming sessions, despite her intensifying purchases, this increases the risks of a Japan debt crisis, as explained before.

Japan’s debt crisis may come sooner than later.  And today may just be a teaser.

The increasing prospects of a Japan debt crisis could herald a return of a global RISK OFF conditions.

On the other hand, if the BOJ continues to massively inflate; such crisis may metastasize into a currency or a yen crisis or a combo of both.

Everything now will depend on the how Japanese policymakers react and how the global financial markets will respond to them. Remember this isn’t just a Japan affair, but given the immense build up of global bubbles, including the Philippines, all it needs is a trigger for all of them to pop. Japan could play such a role.

Today’s rout in the Japanese financial markets is a taste of the blowback from populist unsustainable inflationist policies.

Japan to Offer Gold Coins to Debt Investors

From the Bloomberg/Businessweek

Japanese Finance Minister Jun Azumi will be rewarding investors who buy reconstruction bonds with half an ounce of gold, an added incentive that could boost the return by nearly six times.

Individual investors who purchase more than 10 million yen ($129,000) in the debt with a 0.05 percent return and keep it for three years will receive a gold commemorative coin weighing 15.6 grams (0.55 ounces), the Finance Ministry said in Tokyo today, worth about $948 based on current prices for the precious metal.

The offer suggests the return could be boosted to 89,000 yen should gold prices remain at current levels, more than the approximate 15,000 yen one would receive from the bond. Azumi, whose hometown was devastated by the March 11 disaster, said today he bought 1 million yen of the debt to support rebuilding efforts from the earthquake and tsunami.

This can be viewed as tokenism—reward for not only buying government debt (thereby keeping politicians happy) but for also keeping them.

Even at the margins, such symbolism may be seen as enhancing gold’s image as safehaven asset. Yet this could serve as more evidence where gold will likely be used as prospective collateral for government/corporate debt issuance.

Lastly, with the rate of currency debauchery being undertaken by global central backs which includes the Bank of Japan, it would not be surprising that the current price differential of the gold 15.6 grams coin ($948) and the 10 million yen debt ($129,000) will most likely narrow overtime.

Chart from ycharts.com

Prices of gold based on the yen has more than doubled over a decade.