JGB Watch: Calm markets; Will the Fed Taper tonight? Yawn

Back to my JGB-Japan debt crisis watch.

JGB yields have traded mixed today in what seems as relative composed markets.

JGB 30 year yields modestly rose as 10 year yields marginally declined.

Foreigners reportedly reduced their JGB holdings which now accounts for 8.4% of total outstanding debt from 8.7% last December.

Today, Bank of Japan’s Governor Haruhiko Kuroda announced that “he will do the utmost to avoid sharp rises in long-term interest rates helped the market slightly - but not to an extent that it offset selling in superlong bonds” (Reuters)

One day of calm markets does not a trend make. Good luck to Mr. Kuroda on what seems as wishful thinking.

The relatively tranquil JGB markets allowed Japan’s stock markets to regain some grounds. Today the Nikkei 225 bounced by 1.83%

Yet the propaganda to promote Abenomics continues.

Some of mainstream media continues to mislead the public on the supposed impact of Abenomics.

Early today, Japan's updated merchandise trade data was announced. Interestingly here are two contrasting reports

From Bloomberg:

Japan’s exports surged by the most since 2010 as the yen weakened and shipments to the U.S. jumped, boosting Prime Minister Shinzo Abe’s campaign to revive the world’s third-largest economy

Today’s data may help to sustain confidence in Abe’s efforts to jump-start the economy with fiscal and monetary stimulus and a rollback of regulations restricting business. Volatility in stocks and bonds has threatened to damp sentiment as Abe and central bank Governor Haruhiko Kuroda seek to pull the nation out of a 15-year deflationary malaise.

Yes exports surged alright, but that’s only half of the picture.

From US news:

Japan's trade deficit rose nearly 10 percent in May to 993.9 billion yen (nearly $10.5 billion) as rising costs for imports due to the cheaper yen matched a rebound in exports, the Ministry of Finance reported Wednesday.

Exports rose 10.1 percent in May over a year earlier to 5.77 trillion yen ($60.7 billion) while imports also surged 10 percent, to 6.76 trillion yen ($71.1 billion), the ministry said. Japan's trade deficit in May 2012 was 907.93 billion yen.

So whatever gains from exports has been effectively neutralized by imports. The result: the widening of trade deficits. 

Add to the bulging trade deficit the substantial deterioration of Japan’s fiscal balance, this means that the Japanese will have to dip into their rapidly depleting savings or increase on their colossal debt burden just to finance such deficits.

So deteriorating fiscal, trade and price instability in Japan’s economy will hardly “help to sustain confidence” in Abenomics.

Why is this important? Because media’s framing of the above event exposes on the bias for reckless policies. Some media outfit clearly serves as PR outfits of politicians.

In the same context, people are being conditioned to believe that FED’s convening 'later' (Philippine PM time) will be critical the financial markets.

For instance this headline screams “Will Ben Bernanke let interest rates rise? World markets wait.”

I have repeatedly been pointing out that US treasury yields have been ascendant since July 2012. This happened despite the FED’s QE 3.0 last September which had only a 3-month effect of lowering of UST yields.

Abenomics and ECB’s interest rate cut last May likewise failed to suppress coupon rates of the UST and of their respective bond markets.

French 10 year yields has been rising prior to the supposed Bernanke “Taper talk”.

And so with 10 year JGBs

The point is that yields have been rising even before the so-called Bernanke Taper Talk and will continue to rise regardless of the outcome of today’s FED meeting overtime.

The difference will be on the immediate effects from today’s policy actions.

If the FED will unexpectedly expands QE, then this may have temporarily dampen yields which should spike the stock markets for a short time. But given the diminishing marginal efficiencies of such easing programs, rates will continue to advance later.

Yet if the FED leaves the current program unchanged, then yields will likewise trend higher. 

A Fed "taper" will accelerate the current uptrend.

As pointed out yesterday, US president Obama has hinted on Bernanke’s exit 

If this will hold true, even if another money printer will replace Mr. Bernanke, uncertainty over a regime transition may compound on the pressure to drive yields higher.

For every transition of the FED chairmanship since William Miller in March 1978, increases in FED Fund rates occurred.

10 year yields also reflect on the same pattern, as Bob Wenzel at the EPJ noted

As Federal Reserve chairman Paul Volcker left the Fed chairmanship in August 1987, the interest rate on the 10 year note climbed from 8.2% to 9.2% between June 1987 and September 1987. This was followed, of course by the October 1987 stock market crash.

As Federal Reserve chairman Alan Greenspan left the Fed chairmanship at the end of January 2006, the interest rate on the 10 year note climbed from 4.35% to 4.65%. It then climbed above 5%. 

The current environment seems like the proverbial calm before the bond market storm.