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Alleged “Bond Shortage” As Japan Cruises Towards One “Quadrillion” Yen

Published 03/18/2016, 05:12 AM
Updated 07/09/2023, 06:31 AM
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Bond Shortage!

On Friday, yield on Japanese 10-year bonds hit a record low of -0.135%. According to Bloomberg, the chief strategist of Bank of America Merrill Lynch (NYSE:BAC) in Tokyo stated those 10-year bonds look “relatively cheap”.

Supposedly they are relatively cheap compared to “other tenors”. I presume he means 20-year securities yielding a record low 0.29%.

Meanwhile, the head of fixed-income investment at PineBridge Investments Japan offered this amazing tidbit: Investors are buying shorter-dated debt “as there aren’t enough 30-year, 20-year bonds available.”

Bond Shortage Proposal

Mercy me! There’s an outright shortage of 20 and 30-year Japanese bonds. Japan better float 20 quadrillion yen worth of them pronto.

If that sounds absurd, then please consider additional details from the Bloomberg report Japan 10-Year Yield Drops to Record, Below Negative Deposit Rate:

Japan’s 10-year bond yield dropped to a record minus 0.135 percent, falling below the the negative deposit rate introduced by the Bank of Japan last month, after the central bank’s operation to buy long-term debt met the lowest investor participation on record.

The yield on the benchmark 2026 notes dropped as much as 8.5 basis points after BOJ’s operation Friday to buy bonds with 10 to 25 years to maturity had a bid-to-cover ratio of 1.35, about a third of the level last week. The yield on 20-year securities tumbled more that 10 basis points to an unprecedented 0.29 percent. Forty-year bonds haven’t traded on Friday at the nation’s largest inter-dealer debt broker after changing hands on Thursday for the first time this week.

The results of the BOJ’s bond operation led to “panic buying,” said Shuichi Ohsaki, chief Japan rate strategist at Bank of America Merrill Lynch in Tokyo. Ten-year bonds look relatively cheap compared with other tenors, attracting buyers, he said.

The amount of Japanese bonds in the market offering negative yields has doubled this year to exceed more than 600 trillion yen ($5.4 trillion) earlier this month, driving up volatility in the local market and helping to bring down global yields.

“It goes to show how the BOJ’s negative interest-rate policy is so strong,” said Tadashi Matsukawa, the Tokyo-based head of fixed-income investment at PineBridge Investments Japan. Investors are buying shorter-dated debt “as there aren’t enough 30-year, 20-year bonds available,” he said.

One Quadrillion Coming Up

There’s a mere 600 trillion yen ($5.4 trillion) in negative-yield Japanese bonds. I say “mere” because of the clear shortage.

One quadrillion is 1,000 trillion.

Since there are already 600 trillion yen worth of negative-yielding bonds in the alleged shortage, my preposterous-sounding 20 quadrillion proposal could eventually happen.

At the current pace, we will easily see our first quadrillion in negative yielding bonds by the end of the year. Why not 19 more?

Does this report, and the quotes in it, sound more like it’s from The Onion or Twilight Zone?

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